Hongyun Group and Honghe Group signed a letter of intent Monday, the newspaper 21st Century Business Herald said, citing Li Weidong, an executive of their parent company, China Tobacco Yunnan Industrial Corp. It said the deal requires approval from China's State Tobacco Monopoly Administration.
A woman who answered the phone at Hongyun's press office and refused to give her name declined to say whether a merger was planned. Phone calls to Honghe's press office and the headquarters of the parent company were not answered.
The two companies, both located in the southwestern province of Yunnan, produced 4.6 million cases of cigarettes last year, according to the Business Herald. A case in China's tobacco industry is 50,000 cigarettes, making that equal to 230 billion cigarettes.
That would make the new company the world's fourth-largest producer after Philip Morris International Inc., British American Tobacco PLC and Japan Tobacco Inc.
China has the world's largest population of smokers, with an estimated 350 million.
Its tobacco companies produced 1.2 trillion cigarettes in the first six months of this year, according to the Tobacco Monopoly.
But the industry is fragmented, retail prices are among the world's lowest and producers' revenues are far below those of the global giants.
Beijing is encouraging mergers to create more efficient, profitable producers. The industry's umbrella state-owned company, China National Tobacco Corp., is trying to form 10 major tobacco companies through mergers.
Hongyun Group reported revenue of 29 billion yuan ($4.2 billion) in 2007, while Honghe's revenues were 16 billion yuan ($2.3 billion).
The merged company would be named Hongyun Honghe Tobacco Group Company Ltd. and would have production facilities in Yunnan and the northwestern Xinjiang region, both tobacco-growing areas, the Business Herald said.
(Associated Press)
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