Imperial Agrees to Acquire Altadis for EU12.6 Billion
Imperial Tobacco Group Plc agreed to buy Altadis SA for 12.6 billion euros ($17 billion), gaining Gauloises cigarettes and the world's best-selling cigars after a four-month takeover battle with CVC Capital Partners.
Investors in Madrid-based Altadis will receive 50 euros in cash for each share, or 29 percent more than the price March 14, the day before Imperial's first bid. The U.K. company said it will raise as much as 5.4 billion pounds ($11 billion) by selling new stock to fund Europe's biggest tobacco acquisition.
Today's offer matches CVC's most recent bid, and a takeover would give Bristol, England-based Imperial a bigger foothold in France and Russia with brands such as Montecristo cigars. Cigarette makers have spent $40 billion on acquisitions in the past eight months to eliminate rivals, reduce costs and close factories as smoking bans cut consumption.
``Imperial's the natural buyer,'' said Matthew Kaufler, who helps manage $2.7 billion, including Altria Group Inc. shares, at Clover Capital Management Inc. in Rochester, New York. ``They'll be able to achieve much more in the way of cost synergies than a private-equity firm.''
Shares of Imperial Tobacco closed up 34 pence, or 1.5 percent, at 2,235 pence. Shares of Altadis, whose Montecristo and Don Diego brands make it the world's biggest cigar company, ended the day 0.8 percent higher at 48.50 euros.
The number of bid targets has been shrinking, giving tobacco companies pricing power, after Japan Tobacco Inc. agreed to pay 7.5 billion pounds for Gallaher Group Plc last year. In another deal today, Altria's Philip Morris International will pay $1.1 billion to lift its stake in a Mexican venture to 80 percent.
``For Imperial Tobacco, it's a case of eat or be eaten,'' said Kevin Lyne-Smith, who helps oversee $100 billion at Julius Baer Holding AG's private-banking division. ``They're really down to the local players in specific markets now, which is more of a mopping-up process,'' he said of any future takeovers.
Imperial said the price, including debt, is 14.2 times Altadis's 2006 operating profit. Japan Tobacco paid about 13.6 times Gallaher's 2006 operating profit.
Imperial's main British and German markets are shrinking, adding to the allure of Altadis, which gets most of its sales from Spain and France. The Spanish company owns the largest distributors of tobacco in its home market, Italy and Morocco and sells one in four cigars worldwide. Imperial said it aims to expand Gauloises in Africa and Asia and Fortuna in Latin America.
The offer has a value of 16.2 billion euros including debt. Altadis had turned down previous bids from Imperial of 45 euros and 47 euros a share. The bid is contingent on Imperial gaining control of 80 percent of Altadis's shares and the Spanish company lifting limits on shareholders' voting rights.
The purchase should boost profit in the first year after its estimated November completion, Imperial added. Altadis said it considers the price is ``adequate'' and it will recommend shareholders accept it in the absence of higher offers.
``We're very confident Imperial will do a great job,'' said Anne Gudefin, a London-based fund manager for Franklin Mutual Advisors LLC, one of Altadis's largest shareholders. Chief Executive Officer Gareth Davis ``and his team have a fantastic track record in terms of integrating acquisitions.''
The U.K. company plans to meet with the Spanish and French governments soon about the purchase, Davis said on a conference call. He said he doesn't expect any major regulatory issues. The headquarters of the combined company will be in Bristol, while the cigar and logistics businesses will be based in Madrid.
Visit to Cuba
Davis also said he plans to visit Cuba with Altadis CEO Antonio Vazquez to show his commitment to the Spanish company's venture with the Cuban state-owned tobacco maker. It's the only company that can export Cuban cigars abroad, and the island's government has a clause in its agreement with the company allowing a change if Altadis is bought.
Davis said Imperial sees other possible purchases, though it won't make more acquisitions until it digests Altadis. Imperial plans to sell real estate and a stake Altadis indirectly holds in Iberia Lineas Aereas de Espana SA, Spain's largest airline.
``The offer is quite reasonable,'' said Ivan Diez, a fund manager at Capital at Work Investment Partners, which manages about 2.6 billion euros in Madrid. ``CVC will probably come back with a higher bid.''
Lydia Pretzlik, who handles communications for London-based CVC, declined to comment. Europe's second-largest leveraged- buyout firm bid for Altadis on its own after PAI Partners dropped out of a planned joint offer.
`Put Up or Shut Up'
Imperial Tobacco shares have climbed about 11 percent this year, partly on speculation that Altria may bid for the British company to pre-empt the Altadis purchase.
``It's put-up or shut-up time both for private equity regarding Altadis and for Altria if it is truly interested in Imperial,'' Chas Manso de Zuniga, an analyst at Dresdner Kleinwort, said in an e-mailed note. Altria doesn't comment on speculation, said Timothy Kellogg, a company spokesman.
Imperial, which makes Davidoff cigarettes, Golden Virginia loose tobacco and Rizla rolling papers, expects to save 300 million euros annually two years after the purchase.
The British company expects production, purchasing, sales and marketing expense cuts to cost about 470 million euros. It's proposing that Altadis CEO Vazquez head the combined company's cigar and logistics businesses.
Imperial, Europe's second-biggest maker of cigarettes, would still be smaller than British American Tobacco Plc. BAT and companies it owns stakes in make 930 billion cigarettes a year, while Imperial and Altadis combined make about a third as many. However, Imperial will surpass BAT to become the second-largest seller of tobacco products in Western Europe. Altria's Philip Morris International unit sells the most in the region.
The U.K. tobacco company said Spanish rules will require it to bid for Altadis's distribution unit, Compania de Distribucion Integral Logista SA, or lower its stake to less than 30 percent within three months of gaining control of Altadis. The Spanish tobacco company owns 59 percent of Logista, whose shares jumped 2.7 percent to 57.60 euros in Madrid.
Citigroup Inc., Royal Bank of Scotland Group Plc, Barclays Plc and Santander Central Hispano SA also agreed to lend as much as 9.2 billion pounds to finance the purchase and refinance debt.
Citigroup, Lehman Brothers, Santander and Morgan Stanley are advising Imperial. ABN Amro Holding NV's Hoare Govett unit is a corporate broker to Imperial, as is Morgan Stanley. Altadis has hired Merrill Lynch & Co., Credit Suisse Group, JPMorgan Chase & Co. and NM Rothschild as advisers.
The perceived risk of owning Altadis bonds fell to a three- month low, implying that investors don't think a new bid by CVC is likely. Leveraged buyouts make companies' bonds riskier.
Contracts on 10 million euros of Altadis debt fell 27,000 euros to 52,500 euros, according to Barclays. Credit-default swaps for Imperial fell 2,000 euros to 48,000 euros. The swaps are used to speculate on a company's ability to repay debt. A decrease indicates improving perceptions of credit quality.
Altadis was formed in 1999 as the former French and Spanish monopolies merged. Tabacalera, the former Spanish company, has roots extending to 1636, while France's Seita was created by Napoleon Bonaparte in 1810, according to Hoover's Inc.