[Intl-tobacco] Fin Post: BAT Batting for the top rung

[Robert Weissman]

Saturday, January 01, 2000

Batting for the top rung BAT has swallowed Rothmans, will soon have
Imperial Tobacco, and has its sights on an even larger share of the world
tobacco market

Kathryn Leger in London Financial Post

Billion-dollar lawsuits continue to pile up but nowhere does the big
tobacco business look less under attack than inside the corporate dining
room of British American Tobacco PLC.

Top officers of the world cigarette giant set to assume control of almost
70% of Canada's tobacco market dine at a round table replete with crisp
white linen, crystal and fine china plates emblazoned with BAT's gold
tobacco leaf logo on a royal blue background.

Full-length windows lining one wall of the top-floor suite afford a
sweeping view of the Thames River and many of the city's most famous
landmarks.

Indeed, there are few reasons why Martin Broughton, BAT's chairman and
chief executive, and his team at London headquarters should not feel on
top of the world these days.

So what if tobacco stocks have plummeted 30% in recent months because of
litigation chill and BAT is spending close to $200-million (US) on legal
fees, almost double that of five years ago.

"BAT is in a stronger position than ever," says Mr. Broughton, a 28-year
company veteran who has overseen a massive shuffling of BAT's assets in
the past three years.

"We've narrowed the focus [out of financial services to concentrate on
tobacco] and seen the business as a growth opportunity.

"One of the advantages of all this hassle we get [the lawsuits and
government regulation] is that there is a bigger barrier to entry for
other businesses."

In the past year alone, BAT has orchestrated a blockbuster $11.5-billion
merger with Rothmans International PLC and successfully negotiated a
$10.6-billion bid to privatize Canada's Imasco Ltd.

The Rothmans deal gives BAT capacity to manufacture 900 billion cigarettes
a year and 16% of global market share. That puts it almost neck and neck
with the 17% controlled by arch-rival Philip Morris Cos. Inc., the world's
largest cigarette maker if Chinese National Tobacco Corp., which only
serves the domestic market, is excluded. Annual cost savings will be at
least $410-million (US).

The Imasco transaction, the largest takeover in Canadian corporate
history, will also be highly lucrative.

It calls for BAT to buy the 58% of Imasco it does not already own and
assume full control of Imperial Tobacco Ltd. after selling off the
Montreal conglomerate's other businesses, including the Shoppers Drug Mart
Ltd. chain, CT Financial Services Inc., owner of Canada Trust, and real
estate unit Genstar Development Co.

"Imperial fits perfectly, dominates the market [with 69%] and is a
wonderful cash-generating business," says Mr. Broughton, calling the deal
"largely a tidying up exercise."

Instead of an annual dividend as a 42% shareholder of Imasco, BAT, as full
owner of Imperial, has access to annual free cash flow of at least
$500-million, he says. That represents between 20% and 25% of BAT's
current total annual cash flow of about $2.5-billion.

What to do with Imasco's cash was bound to lead to a "falling out" over
"strategic differences of opinion," adds Mr. Broughton, noting that BAT's
current stake in Imasco accounts for roughly 38% of BAT's market
capitalization of =A38-billion but gives it no real control over decisions.

For some time Imasco had sat on a $1-billion-plus pile of cash and was
seriously looking at expanding its presence in financial services, a
sector BAT left two years ago.

Now, after a full year of complex negotiations over the pricing and sale
of the various parts of Imasco's near $19-billion in assets -- including a
controversial price tag of $9-billion for Imperial -- shareholders are
expected to accept the deal recommended by Imasco's board at a vote
scheduled for Jan. 28 in Montreal.

Already saved from releasing information about BAT's plans for Imperial or
detailed financial information because BAT's proposal is legally
classified as a capital reorganization instead of a takeover, Mr.
Broughton remains equally tight-lipped about the multinational's next big
move.

"Our ambitions don't stop there," he says simply. "We've still 84% [of
global market share] left to go."