Hostile Altadis Bid By Imperial Tobacco May Spark Own Bidding War

By Arindam Nag of Dow Jones Newswires

Imperial Tobacco’s interim results look robust enough for investors to back management if they go ahead and launch a E12.3bn (Pounds 8.4bn, $16.8bn) hostile bid for Altadis, the British tobacco group’s Spanish rival.

But that’s easier said than done. If Imperial ends up taking the unfriendly route it may be exposed as a target itself with bigger rival Altria making a joint bid with Altadis.

Altria, the US owner of Philip Morris and world’s largest tobacco company, has just spun off its Kraft food business, and can now focus on its tobacco portfolio, especially internationally.

Its 2006 results showed that sales have dipped in Japan, Germany and Spain. The last two markets have been recent sources of concern for all tobacco companies, as new taxes in Germany and a clampdown on smoking in public places in Spain bite.

For Altria, another concern is the rising strength of Imperial Tobacco, as well as its new rival in Japan Tobacco, which has bulked up in Europe with its recent Pounds 7.5bn purchase of the UK’s Gallaher.

Altria’s international business is three times the size of its domestic business, and is growing much faster. Hence powerful brands like Imperial’s Davidoff and West are attractive to the US company. There would be some antitrust issues in the EU the combination would have roughly 54% of the market and that’s where Altadis comes in: to pick up businesses that Altria can’t keep.

So even if Imperial which as irony would have it distributes Altria’s Marlboro brand in the UK has to raise its current E47-a- share offer to, say, E48.50 or E49.00, to secure an agreed deal, it could be well worth the effort. Imperial can always sell off some non-core distribution assets to make the numbers.

Imperial’s latest results show why it could be an attractive bid target. Both on a price to earnings (p/e) and on an EV/ebitda (enterprise value/earnings before interest, tax, depreciation and amortisation) basis, it’s cheaper than Altria. Margins in its biggest market, the UK, are its highest, at 63%. And it somehow manages to find new markets outside the tough regulatory zones.

The latest interim results show strong gains in Poland, Taiwan and Vietnam. It’s also setting up a new plant in Taiwan and closing one in the UK, which end up in net savings that will go straight to the bottom line.

No one doubts the industrial logic of Imperial buying Altadis. But some investors in both equity and debt will have reason to feel nervous if Imperial overpays in an all-cash deal.

One way round this would be to allow Altadis investors to participate in Imperial’s growth story. Rather than a rights issue, the UK firm should consider offering shares to Altadis investors.

For Altadis’ top investors Franklin Mutual, Templeton, Fidelity and Morgan Stanley owning some of Imperial’s London-listed paper will reduce the reinvestment risk.

After all, apart from the tax advantages when compared with a cash payment, Imperial’s shares also offer a cashflow yield of more than 6%.

(c) 2007 Sunday Business; London (UK). Provided by ProQuest Information and Learning. All rights Reserved.