Imperial Brands (IMBBY) shares hit a two-month high in London trading Wednesday after it laid out plans for a new joint venture with China National Tobacco that investors are betting will help the London-based cigarette maker to offset the effect of increasingly challenging regulation in some core markets.
Currently the world's fourth-largest tobacco firm by sales, Imperial will jointly own and operate Global Horizon Ventures Limited with the state-owned China National Tobacco, or CNTC, as it develops new products to market both in the world's second-largest economy and elsewhere.
Imperial stock reacted positively to the news, rising by nearly 4% to trade briefly above 3,700 pence ($45), before paring gains to around 1.3% by 15:30 p.m. GMT. The gains put the stock at the highest level since Nov. 8.
The maker of Kools and Winston cigarettes said that CNTC, which owns China's largest cigarette maker Yunnan Tobacco, will also help it to boost sales of its "growth brands" West and Davidoff -- and should result in increasing sales volumes over the course of the next five years.
"We're excited by the growth potential offered by this new business opportunity and look forward to seeing our cooperation with our Chinese partners flourish for many years to come," said Alison Cooper, CEO at Imperial.
Growth of volume and revenue earned outside of developed markets, particularly those in the U.K. and Europe, is positive for Imperial given the increasing threat posed to its bottom line by tighter regulation.
In Europe broadly, tobacco companies face having to comply with EU rules coming into effect at the beginning of May that make plain packaging of cigarettes mandatory -- which firms have said will damage their ability to build and market brands.
Imperial is the most exposed to Europe of all tobacco companies, with its largest markets being the U.K., Germany and France, in that order.
Additionally, the prices charged to consumers continue to be forced upward by tobacco duties levied by governments, particularly in the U.K., where cigarette prices could rise by as much as 50% before 2020 due to government plans to increase duty rates.
Alan Erskine at Credit Suisse recently flagged that tobacco consumers in the U.K. now spend an estimated 15% to 20% of their disposable income on cigarettes, before saying; "In our view, this represents something of an affordability ceiling."
But Imperial is not the first U.K. listed tobacco firm to seek diversification through investment further afield. In November, British American Tobacco (BTI) announced a preliminary offer for Reynolds American (RAI) , valuing it at $47 billion, in a cash and share deal that will see the cigarette giant become a force to be reckoned with in the U.S. as well as deepen its position in Asia.
Although the deal is reported to have run into a number of roadblocks, the majority of analysts expect it to get across the finish line, albeit with a slightly higher offer and an increased cash element to the consideration.