Last week's sale of Sans Souci Hotel by Carreras Group represents a major but not the final stage in the de-conglomeration of the cigarette-led group that once spanned tobacco and coffee farming, financial services, printing, agro-processing, manufacturing, retailing and funds management.
That final stage will come before year-end when the Carreras Group will totally cease cigarette manufacturing in Jamaica, having already transferred the bulk of that operation to Trinidad and Tobago.

By year-end therefore, the once revered conglomerate will become a distributor of cigarettes in Jamaica, and a manager of the billions of dollars in cash it now holds mainly in government paper.

"We (Carreras) are almost there," says managing director Michael Bernard, without any apparent sense of regret. "By the end of November we will have transformed the company into a distribution and marketing company."

Michael Bernard. by the end of November we will have transformed Carreras into a distribution and marketing company

Bernard and the other directors of Carreras Group, see the transformation as being driven purely by economic imperatives. Firstly, to avoid a fairly high-cost jurisdiction, and to take advantage of a high-technology, low cost centre that has unimpeded access to the region through its membership in Caricom.

That country, Trinidad and Tobago, emerged the favourite location around which British America Tobacco (BAT) - Carreras' parent-decided a decided a decade ago to consolidate its regional operation, because of its geography, and technology.

It was therefore no surprise when earlier this year, Carreras announced that it would, on a phased basis, altogether discontinue cigarette manufacture in Jamaica, and would transfer that side of its business to T&T where BAT had already consolidated its regional production, and where the cigarettes would benefit from economies of scale, and modern production facilities.

On Monday Bernard told the Business Observer that Carreras had ceased making the Matterhorn brand last month, but was still manufacturing about two thirds of the Craven A brand that is consumed in the Jamaican market.
"As of November 30, we will have become exclusively marketing and distribution," he added.

Although Carreras will cease manufacturing, some 80 members of staff will remain at the company, largely to drive sales islandwide. Carreras is headquartered at Twickenham Park, Spanish Town and operates depot at three other locations - Ocho Rios, Mandeville, and MoBay.

San Souci is the last of the major assets to be sold.

Bernard explained that the move to Trinidad, and to convert Jamaica into a distribution-only operation would drive down costs, thus redounding to the benefit of shareholders.

"There are a number of benefits from making the move to Trinidad," he said. "For example, we will be able to reduce costs, as well as avoiding having to make significant capital expenditure on new machinery and new technology, which is already available within the Caricom element of the British American Tobacco (BAT) supply chain."

The cost reduction could be as dramatic as 20 per cent.

"Trinidad currently produces cigarettes at fifteen to twenty per cent lower than in Jamaica," said Bernard. "Also, bear in mind that when the rest of our volumes go into Trinidad, the cost will get lower due to economies of scale."

Even with the additional cost of freight and insurance, it will still cost Carreras less to import the cigarettes from the Caricom partner than to manufacture them in Jamaica. No duty will be charged on the imports.

In dollar terms the move to T&T could slash as much as $500 million from the cigarette manufacturing cost, given that last year, it cost Carreras $3.2 billion for its cigarette operation in Jamaica.

Last year, Carreras Group reported net profit attributable to shareholders of $2.46 billion.

Other benefits that Bernard says will accrue to Carreras for transferring its manufacturing to T&T include "access to better packaging and manufacturing technology, as well as better research and development resources and improved marketing communications capabilities, such as placing inserts into the packages".

According to Bernard, such capabilities were crucial in the current regulatory environment where "the avenues for communicating with consumers are being more and more restrictive (due to regulations)".

Two decades ago, Carreras was a vertically integrated producer of tobacco and manufacturer and processor of cigarettes.

But in June 1999, British American Tobacco merged with Rothmans International which then held 47.2 per cent of the local firm.

BAT itself had a subsidiary called Millbank Nominees Ltd, which held 3.2 per cent of Carreras' shares. The combined shareholding gave BAT 50.4 per cent of Carreras, and therefore effective control.

BAT, which had interests within Caricom, began consolidating its operations within the region, including Jamaica.

First, it closed its plant in Barbados and moved it to Trinidad, having decided that the twin island republic represented the best location around which it could centralise its operation.

Factory closure in Guyana and Surinam followed five years later, leaving Carreras' subsidiary - the Cigarette Company of Jamaica; and the West Indies Tobacco Company in Trinidad, as the manufacturing entities within the region.

But long before these closures, Carreras had started to divest itself of some assets - surrendering its Coca Cola dealership in 1984, and later, in 1988 after Hurricane Gilbert selling its 300-acre high mountain coffee plantation to Jamaica Standard Products.

"The process was accelerated after the merger and controlling interest taken in 1999," noted Bernard.

That year the group sold for US$37.7 million, its highly profitable Jamaica Biscuit Company to Caribbean Brands, a Trinidadian biscuit company that manufactured the Bermudez brand of biscuits among others.

In 2000, the group ceased growing tobacco through its company, Agricultural Products of Jamaica, and began sourcing the raw material from contract farmers. Most of the land in St. Thomas that was used for cultivating the tobacco was acquired by the group's pension fund.

In 2001 Carreras ceased sourcing its tobacco locally and began importing the product exclusively from Trinidad, a decision which Bernard said was "strictly economic".

The move towards de-conglomeration took a qualitative leap at the beginning of this decade with the closure in 2000 of Jamaica Flexographic Limited, a company that made packaging material. This was followed in December 2001 with the closure of Graphic Arts Limited - a producer of packaging material. Both entities were liquidated in 2003.

Last year, Carreras sold Twickenham Insurance Company, a general insurance underwriter registered in The Cayman Islands, to Globe Insurance, a subsidiary of the Lascelles Group. Carreras earned US$31 million ($1.9 billion) for the asset.

But one major asset remained on the selling book for two years - the Sans Souci Hotel which was last week sold last to Lee Issa's Couples Resort for US$18.6 million ($1.2 billion).

The cash from the asset sale, and the profits generated from its highly profitable cigarette making business, have enabled Carreras to build up a portfolio of over $12 billion, most of which has been invested in Jamaican government instruments.

The interest income generated from that portfolio has been a major source of revenue and profit over the past several years.

Stockholders equity increased from $4.6 billion at the end of March 1996, to just under $14 billion by the end of March 2004.

But beginning last year, the Carreras Group appeared to have changed its investment philosophy, opting to paying out the cash to shareholders, rather than holding it in the company and continue to invest it on behalf of the shareholders. This move also coincided with the reduction in interest rates on government paper.

For example, in the 2004/2005 financial year, Carreras capitalised over half of the $14 billion in investments on its book to pay out dividends and to distribute capital to shareholders. This translated into $16.80 per share or total payment of $8.2 billion. BAT would have received just over 50 per cent of that amount.

Bernard told the Business Observer that in going forward, Carreras "will be focused on its core activity of marketing and distributing of cigarettes, and working towards maintaining our market position."

He noted: "We believe in the tobacco industry. Our plan is to bolster our position, improve communication with consumers, and operate in a responsible manner through continued implementation of international standards, for instance, we do not want non-adults to smoke."

Carreras: a profile of change

Year Event
1984 Carreras sells Coca Cola Jamaican operation.

1989 Carreras sells 300-acre high mountain coffee farm.

1995 British American Tobacco (BAT) closes its manufacturing
operations in Barbados and moved it to Trinidad, having decided that T&T was the ideal location for centralisation.

1999 BAT (3.2% shareholder) merges with Rothman's International
(47.2% shareholder), and takes controlling interest in Carreras.

1999 Carreras sells Jambisco to Caribbean Brands for US$37.7 million.

2000 BAT closes its factory in Guyana and shifts production to
Trinidad.

2000 Carreras ceases growing tobacco locally, through its wholly owned subsidiary, Agricultural Products of Jamaica. Uses contracted farmers instead.

2000 Carreras closes Jamaica Flexographic Limited, a wholly owned
packaging material printing company.

2001 BAT closes its factory in Surinam and shifts production to Trinidad, leaving operations only in Jamaica and Trinidad.

2001 Carreras altogether stops growing tobacco in Jamaica, and
import exclusively from T&T.

2001 Carreras closes Graphic Arts Limited, a producer of packaging
material.

2003 Both Jamaica Flexographic and Graphic Arts are liquidated.

2004 Carreras sold Twickenham Insurance Company, based in Cayman, to Lascelles Group, for US$31 million.

2005 Carreras ceases manufacturing cigarettes locally, shift
production to Trinidad.

2005 Sans Souci was sold last week to Lee Issa's Couples Resort for
US$18.6 million, ($1.2 billion) after spending over two years on
the block.

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