Glenboden M & A Originations

Imperial’s acquisition of Commonwealth Brands shows that smaller players still have value in tobacco

Priority Rating priority rating 3
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Origination Status company acquisition agreement announced in April 2007;
Asset Commonwealth Brands (CBHC Inc), no. 4 cigarette producer in USA;
Buyer Imperial Tobacco Group plc (UK), no. 5 global tobacco producer (ex-China);
Seller Houchens Industries Inc (USA), parent company of CBHC;
Buyer Rationale market entry into USA, platform for own global brands;
Seller Rationale pressure to sell an asset ?;
NBs Houchens is the biggest worker-owned company in the USA.
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Okay, so Commonwealth Brands is only no. 4 and only in the USA (and Puerto Rico), with only 3,7% share. It’s also focused on the discount segment, of which it has a 13% share. Its brands therefore are not hugely valuable. On the other hand CB’s operating margin is as high as 47%, with operating profit growing at a rate of 8%. This goes to show that tobacco is a business where even smaller players can make good money, and be attractive acquisition candidates; one can expect to keep seeing ‘roll-ups’ of such smaller players, around the world, in future.

This looks like an attractive deal for Imperial, financially and strategically, and also in terms of cultural fit. At the all-important EBITDA level, the valuation is at a significant discount to recent comparative transactions (e.g. JTI – Gallaher, PMI – Lakson).

That the valuation is attractive to the buyer is demonstrated also by Imperial’s announcement that the returns on the acquisition will exceed the Group’s WACC even in year one.

Strategically, CB offers Imperial a good operating platform in supply chain and sales, as well as in manufacturing. A young company by tobacco standards, with key brands launched in 1993/4, it has a nationwide sales network and a modern factory which is operating at under 50% of capacity.

Also, there’s little risk of cannibalisation as Imperial adds its premium international brands to CB’s national discount ones. Selling this broader portfolio shouldn’t be a problem for CB’s salesforce; on the contrary buyers will be happier to get a fuller range from one supplier. There may be a need to widen the number of channels and customer base however.

To cap it all, CB has never lost or settled any product liability claim, and has not been named in any class action lawsuits.

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THIS LEAD'S VALUATION
Size (€ mln) 1.150
Sector tobacco
Asset Quality US no.4 discount
Seller worker-owned
Buyer large plc
P/S 4,3
P/Ebitda 8,6
Type total consideration
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