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Tobacco titans light a deal
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January 11, 1999: 2:21 p.m. ET
Britain's BAT and Rothmans will unite in stock deal valued at $7.55B
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LONDON (CNNfn) - British American Tobacco Plc, one of the world's largest cigarette makers, unveiled plans to buy its smaller rival, Rothmans International, in a deal valued at $7.55 billion.
The marriage of the world's second-ranked BAT (BATS) with No. 4 Rothmans will spawn a tobacco titan that controls 16 percent of global market share with tentacles in hundreds of worldwide markets.
That extended reach will also give the combined company added punching power against its New York-based archrival, Philip Morris Cos. Inc., the world's reigning cigarette heavyweight and maker of Marlboro.
The new entity will generate a combined volume of 900 million cigarettes.
Analysts said the deal stems more from a perceived need to consolidate in the face of shrinking volume growth in many markets, than from fears of a broader backlash against tobacco in the wake of the U.S. lawsuits.
"It's not litigation that's forcing these deals, but markets where volume isn't growing," including the United States, said Jonathan Fell, a tobacco analyst with Merrill Lynch based in London.
Fell said the acquisition of Rothmans would make BAT a more viable global player, with higher capacity and greater clout.
This is "a deal which had to be done in order to combat the threat of Philip Morris globally," Fell said, adding, "This is the big one involving BAT, the one people have been waiting for quite some time."
BAT shares ended up at 624 pence Monday on the London Stock Exchange, a 16.2 percent leap.
The beefed-up entity, operating under the BAT name, will be 35 percent controlled by the Swiss-based luxury goods group Compagnie Financiere Richemont AG and Rembrandt, a South African investment group.
That stake will include 25 percent in voting stock and 10 percent in preferred shares. Based on BAT's closing price on Jan. 8 at 541 pence per share, the Richemont-Rembrandt stake is worth 4.6 billion pounds, or about $7.55 billion.
Richemont and Rembrandt currently own the South Africa-based Rothmans.
The merger is expected to enhance underlying earnings per share, excluding the amortization of goodwill, for the year ending December 2000, the companies said in a statement.
The news of the link-up sent BAT shares soaring 73 pence, or 13.5 percent, to 614 pence on the London stock exchange at opening earlier Monday. Rothmans began trade six percent higher in Zurich.
It also spurred a rally across the tobacco sector, with shares of Imperial Tobacco gaining 25 pence, or nearly 4 percent, to 658 pence, and Gallaher Group stock adding 11-3/4 pence to 420 pence.
BAT said Monday the transaction would result in annual cost savings of at least 250 million pounds ($410.13 million) beginning in the third year after the merger.
BAT also said it expects sales margins to improve as the company integrates Rothmans' strong portfolio of international and premium brands, which is seen generating as much as one-third of the company's total sales.
The new company is expected to dominate markets across Latin America, Africa, Asia and significantly enhance the company's presence as a major market player in Western Europe.
The deal comes at a time when BAT's U.S.-based Brown & Williamson subsidiary is emerging from a series of scathing legal battles stemming from cigarette-related health costs.
BAT sells more than 240 brands of cigarettes, including Kent, Benson&Hedges, and Lucky Strike. In the U.S., the B&W subsidiary makes brands such as Kool, Carlton, Pall Mall, and GPC.
Rothmans' portfolio of cigarettes includes its flagship eponymous brand, along with Dunhill, Peter Stuyvesant, Winfield and Pall Mall.
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