“The line between disorder and order lies in logistics.” - Sun Tzu

The multi-year strategic overhaul occurring at Imperial Brands includes extreme prudence regarding investments in new products—a clear differentiator from its larger competitors and a shift that has now provided it the ability to more aggressively return capital to shareholders. Despite its differentiated strategy, something that Imperial does share in common with larger competitors, aside from extremely lucrative legacy products, is a sizable stake in other ongoing operations. At the time of this writing, Altria’s massive stake in Anheuser-Busch carries a market value of $10.6 billion, equal to 14% of Altria’s market capitalization. British American Tobacco’s stake in ITC comes to $19.5 billion—29.3% of BAT’s market capitalization. Imperial Brands has Logista.

The origins of Logista trace back to the oldest tobacco company in the world, Tabacalera, formerly Compañía Arrendataria de Tabacos, which was the Spanish tobacco monopoly whose heritage dates back to 1636. In 1999, Tabacalera merged with SEITA, which was previously the French state-owned tobacco monopoly, forming Altadis. Along with cigarettes, Altadis held a variety of cigar assets, including a 50% ownership of Cuban state tobacco monopoly Habanos S.A. In 2008, Altadis was delisted from the Madrid Stock Exchange when it was acquired by Imperial Brands. Fast forward to 2020, and Imperial Brands sold Altadis in two transactions; the U.S. assets including Altadis USA and associated online retail were sold to Gemstone Investment Holding Ltd, while Allied Cigar Corporation S.L. purchased the premium cigar assets including the 50% stake of Habanos S.A—each competes with Scandinavian Tobacco Group in different markets.

While Imperial now only holds a much smaller mass-market machine-made cigar operation, it did retain an asset relating to the original business. Along with the merger in 1999, Tabacalera spun off its distribution division, Grupo Logista. In 2008, when Imperial Brands acquired Altadis, the acquired company held a 59.02% stake in Logista. In 2014, Imperial IPOd Logista onto Bolsa de Madrid (the Madrid Stock Exchange) under the ticker LOG, offering ~27.3% of issued share capital. Presently, Imperial Brands holds a 50.1% majority stake in Logista which it recognizes as an operating subsidiary (representing ~9% of its market cap). The current operations of Logista are as fascinating as its rich history.

The Logista of today is not the one of yesteryear. It is modern and even more expansive. Its model is also straightforward: Help move stuff from point A to point B. The group employs thousands, moving millions of products across various parts of Europe, making it one of the largest distributors in the south of the continent. With extensive infrastructure, the company has become a go-to service provider for manufacturers and points of sale alike, handling large parts of the value chain, including ordering systems, real-time stock management software including automated order preparation, transportation and distribution, PoS terminals, and invoicing and collection tools, along with customer service and post-sale service. Products include food, publications, and various consumer packaged goods including tobacco products to points of sale such as markets, convenience stores, and specialty tobacconist shops, as well as pharmaceutical products to hospitals and other medical facilities. Reported points of sale include 150,000 in Spain, 55,000 in Italy, 40,000 in France, and 15,000 in Portugal.

The group’s value proposition to customers rests on efficiency. Logista has continually invested in software solutions, continued route optimization, and specialty vehicles to meet unique needs—with its fleet including customizations with security and protection features for high-value merchandise, cold-chain and refrigeration for perishables and pharmaceuticals, and specialty clearances and certifications to handle other sensitive goods. The last few years have done an exceptional job highlighting the difficulty of this work, with the pandemic sending supply chains into turmoil, creating shortages, along with material cost inflation, spiking fuel prices, and Russia’s invasion of Ukraine to name some of the many additional hurdles. And yet, Logista has not just survived but, relative to peers, thrived, which is evident in its financials.

Mind you, this growth has not been entirely organic. Over the years, the company has embraced bolt-on acquisitions, including several more recent deals:

These three acquisitions bolster the group’s operations by offering express courier, parcel, and specialty long-distance haul services, expanding its footprint, and allowing for the recognition of synergies through cross-selling and further route optimization. These acquisitions, along with strong organic performance, led to adj. EBIT growing 23% y/y in H1 2023, with the reported figure up 14% for the period mostly due to charges related to closing a warehouse to further optimize its footprint. In addition:

The clearest benefit to the parent, Imperial Brands, from the operations of the subsidiary, Logista, is the consolidated financials tied to its controlling stake, found in the company’s reported figures.

Beyond consolidated financial contribution, there are several additional benefits offered to Imperial Brands, the first of which it refers to as a ‘cash pooling arrangement’ with Logista. This is an intragroup loan facility agreement between the two parties—allowing Logista to generate favorable returns on its cash by providing Imperial Brands excess liquidity when specific charges, predominantly arising from the timing of excise tax dues, arise. This agreement was recently renegotiated, increasing the terms to a maximum of €3 billion from the previous €2.6 billion, maintaining 75bps above the reference rate (though switching from ECB to Euribor), and extending to June 2027.

The second benefit is that the distribution stake acts as a defacto hedge against Imperial’s strategy of reigning back NGP spending and instead focusing on legacy products. Legacy products, such as cigarettes, along with facing a secular volume decline, have continued tax increases naturally acting as a headwind and negatively affecting inventory value. These are offset, partly or more than entirely, by price increases set by primary tobacco manufacturers carried through the value chain. Critically, despite traditional tobacco volumes continuing to decline, total tobacco volumes have remained stable for products distributed by Logista thanks to strong growth in next-gen products, with the group more recently citing volume growth specifically in IQOS HTUs. With price/mix continuing to remain favorable, Logista has been able to grow associated gross profits steadily in its core business despite numerous acquisitions made in an attempt to diversify away from it.

With a clear path to continue growing both organically and inorganically, Logista has maintained its payout ratio of ~90%, with future excess to be used for bolt-on acquisitions rather than share repurchases. For context, from 2015-2022, the company returned a total of €1.165 billion to shareholders via dividends—equal to 65.4% of the group’s IPO market capitalization in 2014. As it stands, the company remains another example of the tobacco industry’s continued relevancy and its ability to generate growing value as the world grows ever-dimmer toward its future.