LONDON -- Multiple media outlets are speculating that Imperial Tobacco Group (IMT) could be a takeover target and have named British American Tobacco Ltd. (BAT), Japan Tobacco International (JTI) and Altria Group’s Philip Morris International Inc. (PM) as potential suitors according to a Wells Fargo Securities LLC market analysis.
“We believe a deal is very probable,” said Bonnie Herzog, managing director of beverage, tobacco and convenience-store research for the New York City-based firm. “The most likely scenario is that BAT acquires IMT but spins off its U.S. assets, ITG Brands, in a tax-free spin to shareholders and divests some of the companies' brands in certain markets given antitrust concerns.”
She continued, “We believe [Philip Morris] could play a key role in this transaction since it would likely be interested in certain brands such as Davidoff that would need to be divested. … We believe a takeout of IMT would result in a stronger, more rationale global competitive environment, ultimately driving better industry pricing.”
BAT holds a large minority equity stake (42%) in Winston-Salem, N.C.-based Reynolds American Inc. (RAI). The report said that high share concentrations would likely trigger brand divestitures in several markets--possibly 22 or more--with the highest risk in Australia, France, Germany, Italy, Poland, Spain, the U.K. and the United States, said the report.
“Given antitrust concerns that would likely arise due to BAT’s existing 42% interest in RAI, we don’t believe BAT would be able to acquire IMT’s U.S. business, ITG Brands, nor would it be interested,” she said. “Further, we don’t believe Japan Tobacco or Philip Morris would be interested in acquiring ITG Brands either--JT has to date expressed little interest in the U.S. market and if PM were to make a bid to re-enter the U.S. market we believe it would be more likely to acquire [Altria]; therefore, we believe the most realistic scenario is that ITG Brands would be spun off to shareholders in a tax-free event. In a spin scenario, we expect ITG Brands could command a valuation as high as $12 billion.”
A deal would hinge upon BAT’s ability to Increase its ownership stake in rai to 100% over time, she said.
“IMT/BAT would most likely need to divest several select international brands to meet regulatory approval, [and] BAT will ultimately increase its ownership stake in RAI to 100% in either one transaction or over time to preserve balance sheet strength,” said Herzog.
“We don’t see an IMT/BAT merger having much immediate impact on the U.S. market,” she concluded, “but we do expect the next big catalyst in BAT taking over RAI either gradually or in one transaction.”
RAI acquired Lorillard, the maker of the Newport brand, for $25.9 billion in June. It has divested the KOOL, Salem, Winston, Maverick cigarette and blu eCigs brands to ITG Brands, Greensboro, N.C., for $7.1 billion.
IMT is a multi-national tobacco company with brands including Davidoff cigars, cigarettes and pipe tobaccos; West and Gauloises Blondes cigarettes; Montecristo cigars; Golden Virginia hand rolling tobacco; Drum fine-cut tobacco; Rizla rolling papers; and the Puritane e-cigarette brand. It operates in more than 160 markets.
Based in London, BAT is a global tobacco group with more than 200 brands sold in more than 200 markets.
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