BAT has its sights set firmly on Imasco

[Robert Weissman <rob@essential.org>]

BAT has its sights set firmly on Imasco
Offer a month away: Holdings other than Imperial Tobacco will be sold off
by John Greenwood Financial Post
Date: Tuesday, 6/8/99

Russell Boyce, Reuters / Martin Broughton, chairman of BAT, watches as
Johann Rupert, chief executive of Richemont, lights up.

On the same day it completed a merger with Rothmans International NV,
British American Tobacco PLC confirmed yesterday it is in the midst of yet
another acquisition, this time to buy the remaining 58% of the Montreal
conglomerate Imasco Ltd. that it doesn't already own.

"It's very difficult to say how close we are to a deal," said Michael
Prideaux, a spokesman for BAT, adding the company would have preferred not
to show its hand just yet.

"If Imasco's stock hadn't moved and if the stories hadn't appeared [in the
press], we would have preferred to wait until we had a definite offer to
make."

Sources close to the company said that may be at least a month away, owing
to some of the tax considerations that still have to be worked out, mostly
having to do with the sale down the road by BAT of Imasco's non-tobacco
interests.

BAT is after Imasco for one thing only: its Imperial Tobacco Ltd. division
that controls about 69% of Canada's manufactured cigarette market. As for
Imasco's other holdings, it plans to sell them off. That includes CT
Financial Services Inc., parent company of Canada Trust, Shoppers Drug
Mart, the country's leading drug store chain, and Genstar Development Co.
-- all three profitable and much sought-after businesses.

The rationale for the deal is simple. Back in the 1970s, amid mounting
fears of the dangers associated with tobacco use, British American
Tobacco, as it was then called, changed its name to BAT Industries and
began acquiring other businesses. Starting in 1973, it bought the U.S.
retailer Saks, followed by Marshall Field and Argos. In the '80s, it moved
into insurance, picking two U.K. firms, Allied Dunbar and Eagle Star, and
Farmers Group of the United States.

Then, after the fall of the Berlin Wall, the company took another look at
its strategy. Up until that point cigarettes had been seen as a "mature"
industry. Though sales continue to be robust, the number of people smoking
in North America and Western Europe continues to decline. But with the end
of the Soviet Union, a new market opened up. Formerly controlled by the
government-run tobacco companies, the Soviet market represents an enormous
growth opportunity.

Plus there was the Chinese market, another rich prize. Though dominated by
the national cigarette company there, analysts believe it represents about
a third of the world's cigarette consumption.

"On a world basis, tobacco is a growth business for the major players,"
said Mr. Prideaux.

So, since 1989, BAT has been furiously unloading its non-tobacco
interests, and refocusing on increasing its tobacco business in markets
that will generate above average annual volume growth --in other words,
developing countries. In the developing world, people smoke more when
their disposable income increases. The argument is that people in
developing countries see smoking as one of few attainable luxuries. "If
people in China were given another $10 a year they would smoke more," said
David Adelman, an analyst at Morgan Stanley Dean Witter in New York.
"Whereas in the West, they wouldn't."

In 1990, under threat of hostile takeover, BAT sold its retail operation.
It sold Marshall Field to Dayton Hudson for $1-billion (US) and Saks to
Investcorp for $1.5-billion (US).

In 1998 it announced it would spin off its insurance interests to create
the joint venture Zurich Financial Services Group, a global financial
service organization.

Yesterday, BAT said it had completed its $8.2-billion (US) merger with
rival Rothmans. In Canada, regulatory authorities have said BAT must sell
Rothman's Canadian tobacco interests within a year. Analysts say the
business here is worth more than $800-million.

Today, BAT has about 16% of the global cigarette market, compared with
Philip Morris Cos., its U.S. rival, which holds about 17%.

As BAT has gone through the process of restructuring, analysts have
predicted Imasco would end up on the block. If Canadian Imperial Bank of
Commerce makes a bid for CT Financial, it won't be the first time it has
put in an offer. In 1996 the bank was widely rumoured to have made a run
at the parent company of Canada Trust.

BAT has confirmed the time has come for it to buy Imasco.

But observers warn the potential complexities of the deal could bog down
negotiations. One sticking point is how it would dispose of Imasco's
non-tobacco interests.

"In an ideal world, BAT would like to own all the Canadian tobacco
business of Imasco," said Mr. Adelman. "But the question is, can they
structure something that is attractive to the shareholders of both
companies."