A thick pall of cigar smoke hung over the Karl Marx Theatre as Javier Terres took to the stage to open Cuba’s annual cigar festival last month.

Mr Terres is development director of Corporación Habanos, a joint venture co-owned by the Cuban Government and Altadis, the Spanish tobacco group at the centre of an €11.5 billion (£7.8 billion) takeover approach from Imperial Tobacco, of Britain, this month.

His role sees him preside over an operation that produces the world’s finest cigars, including prestige Cuban brands such as Cohiba, Montecristo and Romeo y Julieta.

Habanos cigars are made from tobacco grown on just 20,000 acres of Cuba’s best tobacco fields, known as Vegas Finas Primeras, all of which are certified by the Government.

Mr Terres is one of the most powerful figures in an esoteric industry steeped in history and tradition. Since Imperial Tobacco’s approach for the Madrid-based Altadis, he has also become a critical figure in a puzzling debate over the future of one of Cuba's most important export industries. With Imperial Tobacco widely tipped to return with a higher offer and talk of possible rival interest in Altadis from private equity groups, Habanos is hot property.

In 2006, cigars accounted for €888 million, or 22 per cent, of Altadis’s €4 billion of sales. That compares with 43 per cent for cigarettes, including brands such as Gitanes and Gauloises, and 30 per cent for Altadis’s logistics business.

However, it is Habanos’s unique potential that makes it one of the company’s most prized assets. “If the US market opened tomorrow, it would triple the size of our global market,” Mr Terres told The Times. “But right now we cannot sell a single cigar there.”

In spite of their high quality, Cuban cigars remain locked out of the world’s largest premium cigar market by a 50-year-old US trade embargo. If it were eased, Habanos and its parent company could become the only group able to export handmade Cuban cigars to a market worth an estimated $1.8 billion (£915 million).

It is a compelling argument, one that Altadis is keen to make, yet Simon Chase, marketing manager of the British cigar importer Hunters & Frankau and a 30-year industry veteran, is not so certain.

There are many legal questions over the rights to market Cuban brands in the United States. Already, many premium cigars are sold in America under the same brand names but made with Dominican, Honduran or Nicaraguan tobacco because other companies, such as Swedish Match, own the US rights to them.

At the same time, there are still Cuban exiles living in the US who claim ownership of land and property used in the manufacture of Cuban cigars. With this in mind, it seems inevitable that any easing of the embargo would trigger a legal battle. Moreover, there are questions over the ability of the Cuban cigar industry to meet a sudden upturn in demand.

With so many uncertainties, Andrew Darke, tobacco analyst at Evolution Securities, says that placing a cash valuation on Habanos is extremely difficult.

To complicate matters further, President Castro’s Government reserves the right to force any new owner to sell off the Habanos subsidiary. Altadis acquired its stake in Habanos in 2000 and, under the terms of the agreement, the Cubans have change-of-control rights.

“If Imperial returns with a higher offer and it is accepted, they would certainly have to have a dialogue with the Cuban Government about it,” he said.

Heaven scent

—Like fine wine, the taste of top tobacco depends much on the soil and climate in which it is grown

—Sun-drenched plantations outside Havana and in the neighbouring western province of Pinar Del Rio have made Cuban cigars famous for centuries. Most cigars produced here are hand-rolled and intended for the premium market

—The top markets for Cuban cigars are Spain, France and Germany, as well as Cuba

—Despite the American embargo, Cuban cigars account for as much as 35 per cent of cigars sold worldwide

—Americans smoke up to 220 million top-end cigars a year

—A new line of cigars for the island’s signature Cohiba brand, called Maduro 5, was launched this year. They are finished with a wrapper leaf that has been aged five years. Wrapper leaves are essential to how a cigar burns

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