British American Tobacco (BAT) said on January 26 it plans to work with the Bosnian government to address the high level of illicit tobacco sales in the country after buying local manufacturer Fabrika Duhana Sarajevo (FDS). 

BAT has reached an agreement with Austrian investment company CID Adriatic Investments to buy its 78.7% stake in FDS. The transaction is expected to close in the first half of this year. after approval from the shareholders of the Bosnian tobacco company. 

BAT said in a statement emailed to bne IntelliNews that it plans to build on the strength of FDS and its local brands, especially Drina, the oldest of FDS’s brands currently on the market. FDS itself has a long history in Bosnia; the Sarajevo tobacco factory was one of the first industrial companies in the country when it was founded back in 1890. 

However, Ram Addanki, CEO of BAT Adria, commented that tobacco operations in Bosnia & Herzegovina “are extremely challenging due to the high level of excise vs income levels which has resulted in high levels of illicit trade.” Illicit sales are estimated at more than 30% of total tobacco sales, resulting in annual losses to the state budget of more than BAM210mn (€107,000). 

“We are open for cooperation with the government in order to help to quickly resolve this issue."said Addanki said in the statement. 

CID acquired a 39.9% state-owned stake in FDS at an auction on the Sarajevo Stock Exchange (SASE) in September, paying BAM42.7mn. Three months later, CID raised its stake to 78.7%, paying another BAM41.6mn for a 38.8% additional stake. BAT funded both deals with the intention to acquire FDS’ shares at a later stage.

BAT will now acquire all FDS tobacco brands and retail business, as well as entering into a contract manufacture agreement with FDS to continue production of the brands. Meanwhile, CID will continue to develop the non-tobacco parts of FDS independently.

Data from the Sarajevo Stock Exchange shows that the remaining shares in FDS are owned by several banks and investment funds.

BAT has previously invested in the region, buying Croatian conglomerate Adris Grupa’s tobacco unit TDR in addition to other tobacco and retail assets in 2015. The deal was worth €505mn, and included assets in Bosnia and Serbia as well as Croatia. 

More recently, in July 2016, BAT raised its stake in Croatian food and retail group Agrokor’s newspaper and tobacco distributing unit Tisak by 16%, according to local media reports. BAT had already taken a 25.8% stake in Tisak through its acquisition of TDR and there is now speculation that BAT could be planning a takeover of Tisak.

FDS operates in the Bosnian Federation. Bosnia has one more tobacco factory, Fabrika Duvana a.d. Banja Luka, which operates in the country’s smaller entity, Republika Srpska.