Glenboden M & A Originations

Imperial Tobacco bid for Altadis brings both of them into play as acquisition candidates for BAT

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Origination Status unsolicited bid made for group acquisition, March 2007;
Asset Altadis Group (Spain and France), no. 6 global tobacco producer;
Buyer Imperial Tobacco Group plc (UK), no. 4 global tobacco producer;
Seller Altadis shareholders;
Buyer Rationale to survive this round of tobacco consolidation as an independent;
Seller Rationale management intends to remain independent and rejects approach;
NBs BAT previously expressed interest in both Imperial and Altadis, at the right price.
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Finally a concrete step taken towards a second major tobacco consolidation, after JTI’s acquisition of Gallaher three months earlier. We’re going to stick with our earlier prediction, that an Altadis-Imperial tie-up is too much of a ‘marriage of equals’, since both have about 2 -3% global volume share. We still think that the real acquirer should be BAT, global no.2 with 12% volume share, and that their target should be Imperial.

Look at history; in 1999 Japan Tobacco acquired RJ Reynolds International and in that same year BAT acquired Rothman’s.

Imperial’s rationale in making the bid might have been to mark out Altadis as BAT’s target, rather than itself. Of the two, Imperial has the better track record in acquisitions, and so arguably is the more viable as an independent.

Altadis hasn’t made any major tobacco acquisitions since its creation through the merger of Seita (France) and Tabacalera (Spain) in 1999. Imperial, on the other hand, acquired Reemtsma in 2002, a major consolidation play; full rights to the premium Davidoff brand in 2006; and most recently aggressively entered the US market by acquiring Commonwealth Brands.

We estimate this bid to be at a slight discount to the Gallaher deal in P /EBITDA terms. This might reflect 2006 Altadis’ weaker performance in 2006, which saw a decline in sales value and operating profit, caused largely by a ‘double whammy’ in Spain - bans on tobacco advertising and smoking in public places and, worse, a rise in the specific-rate excise duty.

The rate hike in Spain closed the price gap between Fortuna and premium brands, notably Marlboro, which slashed sales of that flagship brand by 33%, and Fortuna lost its no. 1 –selling brand status to the all-conquering Marlboro. Another minus is the fact that neither of Altadis’ star brands, Gauloises and Fortuna, are in the premium segment.

On the other hand, we see in Altadis a robust business model with significant upside potential, giving it more ‘stand-alone’ sustainability than Imperial. This, plus the greater cost synergies that BAT would extract with Imperial (who’s more weighted in cigarettes), mean that it should retain its independence.

Management insists that all three of Altadis’ business units – cigarettes, cigars and logistics – are strategic; there’s no doubt that such a ‘hedge’ improves the quality of earnings and creates growth opportunities.

Cigars and logistics together make up over 50% of total Altadis sales and EBITDA. Altadis is global no.1 in cigars, and focuses on the premium segment in high-value markets, mainly the US, where it enjoys significant price flexibility. Innovations like super-premium Montecristo branded cigarettes point to significant upside, as does the focus on Havana luxury cigars in emerging markets, the image of which can only improve.

As for logistics, more that 50% of sales are now non-tobacco and this proportion is growing; the group’s logistics footprint is huge in its core markets, creating major barriers to competition and prime positioning to exploit high-margin segments like pharmaceuticals.

Thanks to this three-legged strategy, the overall Altadis sales decline was only 3,5% in 2006, even though cigarette sales fell by 14,5%, thanks to better performance in the other two business units.

At the EBITDA level the story is the same. Note also that Altadis has entered year two of a restructuring plan to reduce costs and divest non-core assets, and now has a unified board, all of which will allow for a more bullish forecast for the group in 2007.

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THIS LEAD'S VALUATION
Size (€ mln) 13.700
Sector tobacco
Asset Quality global no.5 branded
Seller large plc
Buyer large plc
P/S 3,5
P/Ebitda 11,9
Type enterprise value
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