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LONDON — More changes in the tobacco arena could be on the horizon.
According to numerous reports, Imperial Tobacco Group could be a takeover target, with British American Tobacco and Japan Tobacco as possible buyers. Philip Morris International Inc. has also been named among the interested parties.
None of the tobacco companies have confirmed interest in a possible deal for Imperial.
"We believe a deal is very probable and the most likely scenario is that British American Tobacco acquires Imperial Tobacco, but spins off its U.S. assets, ITG Brands, in a tax-free spin to shareholders and divests some of the companies' brands in certain markets given antitrust concerns," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC.
Herzog added that Philip Morris International could play a key role in the transaction since it would likely be interested in certain brands such as Davidoff that would need to be divested.
As Herzog explained, British American Tobacco would most likely spin off ITG Brands due to its 42-percent minority stake in Winston-Salem, N.C.-based Reynolds American Inc. (RAI). In addition, British American Tobacco could ultimately increase its ownership stake in RAI to 100 percent in either one transaction or over time to preserve balance-sheet strength.
"Given antitrust concerns that would likely arise, we don't believe British American Tobacco would be able to acquire Imperial Tobacco's U.S. business, ITG Brands, nor would it be interested," Herzog said, adding that Wells Fargo Securities doesn't see Japan Tobacco or Philip Morris International interested in ITG Brands either.
"Japan Tobacco has to date expressed little interest in the U.S. market and if Philip Morris International were to make a bid to re-enter the U.S. market, we believe it would be more likely to merge with The Altria Group," she explained. "Therefore, we believe the most realistic scenario is that ITG Brands would be spun off to shareholders in a tax-free event."
Under a spin scenario, Wells Fargo Securities' analysis indicates ITG Brands could command a valuation as high as $12 billion.
"In sum, we don't expect an Imperial Tobacco/British American Tobacco merger to have an immediate impact on the U.S. market, but expect the next big catalyst to be British American Tobacco's increased stake in RAI," Herzog concluded.
Talk of an Imperial Tobacco sale comes five months after RAI completed its acquisition of fellow tobacco company Lorillard Inc. As part of the three-way deal, Imperial Tobacco paid $7.1 billion for the Winston, Kool and Salem brands from RAI and the Maverick and blu eCig brands from Lorillard. These acquisitions built on Imperial's existing U.S. portfolio at Commonwealth-Altadis, making it the No. 3 tobacco company in the United States.
In addition, Imperial Tobacco acquired Lorillard's infrastructure, which includes the company's manufacturing facility, Greensboro, N.C. headquarters offices, research and development facility, and approximately 2,900 employees.