[Ip-health] A Match for European Tobacco Giants?

[Joana Ramos]

No comments of course were made about the health benefits accruing to
the European people ,and the across -the board cost savings to people,
employers, governments, etc. from this business "downturn."

Joana

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http://www.businessweek.com/globalbiz/content/jul2007/gb20070718_469098.htm=
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A Match for European Tobacco Giants?
British cigarette maker Imperial makes a bid for Franco-Spanish rival
Altadis, maker of Gauloises, in a bid to counteract falling sales

<snip>
> Reduced smoking rates are hitting companies' bottom lines and creating
> excess production capacity across the continent.
<snip>

by Mark Scott
Business Week
Europe
<http://newsletters.businessweek.com/c.asp?667601&17b74417803463cc&9>
Cigarette companies have been taking some serious knocks in Europe.
Restrictions on tobacco advertising, widespread public smoking bans
across the continent, and ever-rising taxes are discouraging people from
lighting up. No wonder companies are looking to join forces. On July 18,
Britain's Imperial Tobacco (ITY) announced a $22.3 billion offer for its
Franco-Spanish rival Altadis (ALDS.PA), a merger that would make it the
world's fourth largest tobacco company.


A potential deal between the companies has been under discussion since
2004, and in March Imperial offered to buy Altadis for =8045 per share, or
about $60 at the time (see BusinessWeek.com, 03/15/07, "A Tobacco Giant
Arises in Europe"). That offer was subsequently topped by
Luxembourg-based private equity firm CVC Capital, but Imperial's latest
bid, at =8050 ($69) per share could carry the day.


If the deal goes through, it will be the latest in string of mergers
among European tobacco companies looking to boost revenues and squeeze
costs as their businesses come under increasing pressure. Reduced
smoking rates are hitting companies' bottom lines and creating excess
production capacity across the continent. Imperial hopes the merger will
produce cost synergies of an estimated $413 million by 2009=97presumably
via plant closings and head-count reductions=97helping it battle dwindling
margins and intense competition from rivals.


Trip to Marlboro Country?

The merger also will give Imperial greater scale across Europe and
around the world. Chief Executive Gareth Davis told analysts on July 18
that the combined company would have 46% market share in Britain, 28.5%
in France, and 27% in Germany. Citigroup figures Imperial's share across
the whole of Europe and the former Soviet Union will be 16.6%, vs. 10.5%
prior to the merger.

The announced deal, which has the support of the Altadis board, may not
be the final word, however. Analysts say that other tobacco companies,
including Marlboro-maker Altria (MO), British American Tobacco (BTI),
and Japan Tobacco (2914.T) could make rival plays for Altadis. CVC
Capital or another private equity shop also could up the ante. Though
Altadis is known to favor merging with another tobacco company, its
board would be obliged to consider all higher offers.

"The ball will be in private equity's court to see if its business case
stacks up at a higher price for Altadis," Dresdner Kleinwort analyst
Charles Manso de Zuniga says in a research note.

How does the math add up for Imperial's bid? Pretty well, according to
JP Morgan analyst Erik Bloomquist. About 45% of the purchase price will
be in the form of stock, and financing the remaining $12.3 billion won't
substantially raise the company's 5.4% debt cost. Imperial also will
benefit from the expected sale of $898 million in non-core assets, as
well as cost savings in production, purchasing, and sales.


Have a Cigar

Best of all, Imperial gets its hands on Altadis' lucrative cigar
business. The Franco-Spanish company owns the Montecristo and Don Diego
brands and is the world's largest cigar producer. Incorporating this
high-margin business will give Imperial a leg up on rivals, especially
in the U.S. and emerging economies, where cigars continue to be very
popular.

Still, even after the merger Imperial will lag well behind rivals in
Europe. According to Citigroup research, Altria commands 33.9% of the
European market, while BAT has 20.1%. Japan Tobacco, which snapped up
British cigarette maker Gallaher Group in December, 2006, for $19
billion, now has a 20.9% share (see BusinessWeek.com, 12/15/06, "Japan
Inc.'s Buying Tour Reaches Britain").

Imperial needs Altadis in its quiver to stay in the competition, so the
next three months will be crucial. Spanish stock market authorities have
eight weeks to approve the deal, and then other companies will have a
month to put forth rival bids if they wish. Executives at Imperial will
be biting their nails=97or smoking more cigarettes=97for a few months to co=
me.

Mark Scott is a reporter in BusinessWeek's London bureau.


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Joana Ramos, MSW
Cancer Resources & Advocacy
Seattle WA USA
+1-206-229-2420
http://ramsolink.info/
www.cancersurvivorsproject.org
www.healthyskepticism.org
www.mavinfoundation.org