Glenboden M & A Originations

Imperial’s acquisition of Altadis ends this round of tobacco consolidation

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Origination Status group acquisition completed, January 2008;
Asset Altadis Group (Spain and France), no. 5 global tobacco producer;
Buyer Imperial Tobacco Group plc (UK), no. 4 global tobacco producer;
Seller Altadis shareholders;
Buyer Rationale expansion of geography, brands, products, scale; operating synergies;
Seller Rationale acceptable valuation, attempts to remain independent have failed;
NBs this acquisition will consolidate Imperial’s position as no. 4 global tobacco producer.
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With Imperial finally succeeding in its acquisition of Altadis, we can’t see any other global tobacco consolidation in the foreseeable future. On the other hand, one can anticipate that both Philip Morris and BAT will continue to acquire national no. 1 or no.2 brands, often through privatizations, all over the globe. There’s also the probability that BAT will finally acquire the majority stake in House of Prince, the largest Scandinavian tobacco player. One also shouldn’t forget the potential for secondary sales after the Altadis deal, in particular of its Logista arm.

In the wake of the JTI – Gallaher deal, and again later when Imperial made its first (rejected) bid for Altadis, we predicted that an Altadis-Imperial tie-up is too much of a ‘marriage of equals’. We believed that the real acquiror, hiding in the shadows, will be BAT, and that their quarry will be Imperial not Altadis. The reason why we thought Altadis would survive, not Imperial, is that it has a robust ‘three-legged’ business model, spanning cigarettes, cigars and logistics, giving it arguably more ‘stand-alone’ sustainability than the more cigarette –focused Imperial. We believed that, overall, more shareholder value would be created if BAT acquired Imperial, because of the greater synergies in that scenario.

Nonetheless, in the absence of BAT’s participation, an Imperial-Altadis tie-up is the second best thing for tobacco consolidation at this time, and it’s to be expected that Imperial would take the lead, for three reasons. Firstly, Imperial has the better track record in acquisition; Altadis hasn’t made any significant deals since it was created in 1999 through the merger of France’s Seita and Spain’s Tabacalera; since that time Imperial has acquired Germany’s Reemtsma, the Davidoff brand and, most recently, Commonwealth Brands in the US. Secondly, Altadis had a weak performance in 2006, including a decline in sales and the loss of its no.1 position in Spain (Fortuna brand). Thirdly, Altadis shareholders may be impatient with the time taken to unify top management and complete a restructuring programme.

There is significant risk, however, of conflicts over strategy, as well as social problems, in an Imperial-Altadis merger, that might leave shareholders wishing that BAT had acquired Imperial after all. Imperial has announced cost synergies of € 300 mln per annum, and a divestment programme for non-core assets valued at € 650 mln; numbers that were stretched by the need to find ‘additional value’ in order to justify increasing Imperial’s initial offer. This this may jar with Altadis’ interpretation of the deal, in particular Imperial’s undertaking to maintain a substantial presence in France and Spain, integrate the businesses ‘without prejudice’, and to honour Altadis employees’ contractual, pay and benefits arrangements. Strategically, Altadis believes its logistics business to be a core one, providing a ‘hedge’ to tobacco revenues and an avenue for diversifying beyond tobacco. Imperial, for its part, has simply said that it will review options for the Logista business, after the acquisition.

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THIS LEAD'S VALUATION
Size (€ mln) 16.200
Sector tobacco
Asset Quality global no.5 branded
Seller large plc
Buyer large plc
P/S 4,1
P/Ebitda 14,2
Type enterprise value
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