ANALYSIS-BAT-Imasco fires up tobacco M&A (fwd)

[Robert Weissman <rob@essential.org>]

by Kevin Drawbaugh, European Consumer Goods Correspondent

LONDON, Aug 3 (Reuters) - British American Tobacco quickened the pace of
consolidation in the embattled world cigarette business on Tuesday by
agreeing to buy out Canada's largest cigarette maker, Imasco Ltd..

The long-rumored deal was viewed by analysts as the first step in a
two-part move that will soon see BAT sell off a controlling interest in
Canada's number-two cigarette maker, Rothmans Inc., to satisfy competition
regulators.

U.S.-based Philip Morris is seen as the most likely buyer of Rothmans
Inc., valued at between 650 and 700 million pounds ($1.05 to $1.13
billion), analysts said.

When the smoke clears in weeks ahead, two more tobacco firms will likely
have vanished into the jaws of BAT and Philip Morris, reflecting rapid
tobacco industry rationalisation in the face of shrinking core markets and
constant outside attacks.

``With the world tobacco markets being as weak as they have been in the
last three or four months, it tends to force this pace of consolidation,''
said industry analyst Andrew Darke at investment bank and brokerage
Williams de Broe.

BAT, the world's second-largest tobacco group, said it agreed to buy the
58 percent of Imasco that it does not already own for at least 4.2 billion
pounds ($6.8 billion).

The final price will depend on proceeds from the sale of Imasco assets
that BAT plans to divest, including its drugstores, property and financial
services units, BAT said.

Analysts said regulatory approval of the Imasco deal will likely be
contingent upon the sale of Rothmans Inc., which BAT took on board earlier
this year with the purchase of global Rothmans operations for $7.5 billion
from Switzerland's Richemont and South Africa's Rembrandt.

``All the money is on Philip Morris buying'' Rothmans in Canada, of which
the U.S. giant already owns 40 percent, said an industry analyst who asked
not to be named.

As a result of the deals, BAT will end up with about 69 percent of
Canada's mid-sized but highly profitable cigarette market, excluding
Rothmans. The UK firm will also reduce its exposure to non-tobacco
operations, thereby furthering its goals of getting bigger and more
specialized at the same time.

``The important thing from BAT's point of view is that the Imasco
transaction gives them direct access to the cash flow, rather than only
having access to a dividend flow,'' Darke said.

BAT has led the way in a global scramble for size and focus as the
$275-billion world tobacco industry battles declining markets and constant
assaults from lawyers and politicians.

Four groups -- BAT, Philip Morris, Japan Tobacco and government-run China
National -- now hold 65 percent of the world cigarette market and smaller
rivals are vanishing fast.

``The problem they really face is the international tobacco market is just
not growing. It's shrinking,'' one analyst said.