SEITA/TABACALERA: Merger terms worry investors (fwd)

[Robert Weissman <rob@essential.org>]

SEITA/TABACALERA: Merger terms worry investors
by Samer Iskandar in Paris  
Source: Financial Times, Thursday, 10/7/99

Shares in France's Seita and Tabacalera of Spain, which are merging to
form the world's fourth largest tobacco group, fell sharply yesterday as
the two groups outlined details of their deal.

Some investors were disappointed by the terms announced yesterday - 19
Tabacalera shares and E7.50 (E5 after tax) cash for six Seita shares -
which value the French company at a discount to its closing price on
Tuesday.

However, bankers said the share price falls of more than 5.5 per cent in
the two companies' shares yesterday were the result of a combination of
factors, including inflated expectations by investors and the after-shock
of speculation in the previous days.

Annie Bonal, food and tobacco analyst at Crédit Lyonnais in Paris, said:
"Giving more generous terms to Seita shareholders would have destroyed
value in the merged entity. At worst, the deal is neutral, but certainly
not negative."

Others were concerned by the double-headed leadership structure of the new
company, to be called Altadis.

Jean-Dominique Comolli, head of Seita, will be co-chairman in charge of
cigarettes. César Alierta Izuel, Tabacalera chairman, will be co-chairman
with responsibility for cigars and distribution.

This did not temper the optimism of analysts, however, who were becoming
increasingly bullish on the two groups.

Jonathan Fell, European tobacco industry analyst at Merrill Lynch, said:
"Mr Comolli has the experience of doing what needs to be done at
Tabacalera's cigarette operations."

Seita is more advanced than its Spanish partner in its cost-cutting
programme, after Mr Comolli's recent success in negotiating a three-year
restructuring plan with unions and staff.

Merrill Lynch yesterday upgraded its rating on Seita from "accumulate" to
"buy". Mr Fell raised his target for Tabacalera's share price to E24,
equivalent to E81 on Seita.

Mr Fell said one explanation for the share price fall was disappointment
that cost synergies - put at E70m to E100m ($75m to $107m) by 2001 - were
considered too modest.

"This deal is not about cost-cutting," he said. "It is about long-term
growth prospects, and these are looking better."

Other bankers said the fall was a normal correction after the recent
speculation. Last Friday, Seita shares were suspended after rising more
than 10 per cent. This prompted both companies to confirm on Monday that
they were in merger talks, which in turn led to further speculation for
another two trading days before the merger was formally announced.

Ms Bonal pointed out that yesterday's fall brought Seita shares back to
the region of their pre-merger levels.