BRISTOL, England -- Imperial Tobacco Group PLCwhich makes Lambert & Butler and Richmond cigarettes in Britainsaid that it has agreed to acquire 100% of CBHC Inc, which trades as Commonwealth Brands, from Houchens Industries Inc. for a total cash consideration of $1.9 billion (974 million).
After taking into account the net present value of tax benefits arising as a result of the deal, the net cost of the acquisition is $1.5 billion (769 million), the company said.
Commonwealth Brands, Bowling Green, Ky., is the fourth largest [image-nocss] cigarette manufacturer in the United States, with 3.7% of the $376 billion U.S. cigarette market. It employs about 720 people and has a factory that currently manufactures approximately 14 billion cigarettes a year, but has the capacity for 30 billion cigarettes a year.
Brands include USA Gold, Montclair, Malibu Lights, Sonoma and Riviera cigarettes, as well as Bali Shag and McClintock roll-your-own and make-your-own papers.
Imperial Tobacco said it anticipates that the acquisition will be completed by April 2007 and will be earnings accretive in the current financial year, before taking account of brand amortization and deferred tax on intangibles. It also anticipates that the returns will exceed its weighted average cost of capital in the first full year.
Gareth Davis, CEO of Imperial Tobacco, said, This is an excellent deal for Imperial, which will create significant value for our shareholders, and is consistent with our strategy of entering the U.S. tobacco market in a low-risk manner. I am delighted that we will finally have the U.S. as a significant part of our international footprint and believe that we will benefit considerably from having the U.S. in our market portfolio.
He added, Commonwealth Brands is a terrific, young business which gives us immediate and significant access to the world's most profitable tobacco market. The acquisition provides us with an enhanced operating platform from which we can rapidly launch our own high quality brands. We will also now avoid the costs associated with our original organic entry, which we estimate would have been in the region of $20 million a year. As well as its vast cigarette market, the U.S. has a growing market in other tobacco products and papers. Given the strength of our multi-product portfolio and our world leadership in fine cut tobacco and papers, we believe we are very well positioned to take advantage of the growth in these sectors.
In the year to Sept. 30, 2006, Commonwealth Brands generated earnings before interest, tax, depreciation and amortisation (EBITDA) of $174 million (89 million).
In the year to Sept. 30, 2006, Commonwealth Brands generated revenue less duty of $348 million (178 million) and earnings before interest and tax of $164 million (84 million). Profit before tax for the year was $59 million (30 million) after one-off costs of $64 million associated with debt refinancing. Gross assets at 30 September 2006 were $1.2 billion (615 million). In the first quarter of its current financial year, Commonwealth Brands' earnings before interest and tax grew by 8% to $41 million.
Commonwealth Brands manufactures and sells five high quality discount cigarette brands across the United States and in Puerto Rico, which together account for 13.2% of the discount segment. The two key brands are USA Gold and Sonoma. USA Gold is the eighth best-selling cigarette brand in the US and Sonoma the fourteenth. Commonwealth Brands' other cigarette brands are Montclair, Malibu and Riviera. Total sales in the year to Sept. 30, 200,6 were 14 billion cigarettes.
Commonwealth Brands manufactures its cigarettes in a single factory in Reidsville, N.C.
Commonwealth Brands' key brands were launched in 1993 and 94 and therefore have a short history. It was the first tobacco manufacturer to voluntarily sign the Master Settlement Agreement (MSA) in 1998 and has complied with MSA restrictions on advertising and marketing. The company has never lost or settled any product liability claim, has not been named in any class-action lawsuits and was not a defendant in the U.S. Department of Justice case, it said.
These factors, combined with the recent and considerable improvements in the U.S. litigation landscape, led Imperial Tobacco to conclude that the overall U.S. litigation risk for Imperial Tobacco and Commonwealth Brands is low, and it is very confident of being able to manage that risk as effectively as it has in the other markets in which it operates.
In a research note, Credit Suisse analyst Filippe Goossens wrote, We see the announcement as confirmation of our view that it is difficult to establish a meaningful footprint in the U.S. organically. With Commonwealth, the largest player in the fragmented value segment,
Imperial opted to limit its legacy litigation risk but will still face the challenge of building brand awareness in light of the constraints imposed by the MSA. Despite original plans to enter the U.S. market organically, an acquisition opportunity arose for IMT at the end of the year and Imperial jumped at the chance to accelerate its market entry.
He added, [Imperial's] pricing strategy will be driven by a desire to maximize profitability. It will likely seek to take advantage of Commonwealth's significant excess production capacity when
introducing some of its European brands. Fine cut might be one of the greatest opportunities for IMT with smokeless tobacco being a medium to longer-term proposition. It will use its experience operating in a heavy regulated market like Europe if there would ever be FDA regulation in the U.S.
Other analysts have said Imperial could be a target itself for the world's two biggest cigarette companies, Altria Group Inc and British American Tobacco Plc, working with partners to avoid competition concerns, added a Reuters report. There would be competition problems left right and center and Commonwealth Brands would only add to those competition problems, UBS analyst Jonathan Leinster said.
Imperial was reported to be considering a 10 billion ($13 billion) bid for Franco-Spanish tobacco group Altadis as the cigarette market consolidates, but Davis appeared to rule out a bid in the near future.
Our focus is very much on this deal ... we will be concentrating all our attentions on making sure it is a whopping success for us. But I would say our strategy remains unchanged - we will grow shareholder value by organic and acquisition growth, Davis said.
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