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Imperial Tobacco Agrees to Acquire Altadis for $22.4 Billion

David Savona
Posted: July 18, 2007

UPDATED: The bidding war for Altadis S.A. appears to be over. This morning, Imperial Tobacco PLC announced that the board of Altadis S.A., the world's largest cigar company, had agreed to be acquired by Imperial for 16.2 billion euros ($22.4 billion). The deal, which has been in the works since mid-March, should close by the first quarter of fiscal 2008. The purchase price includes Altadis debt being assumed by Imperial.

"This announcement has seemed a long time in coming to many of you, and I can assure you it has been the same for us at Imperial," said Gareth Davis, chief executive officer of Imperial, in a video briefing to analysts and the media. "Altadis and Imperial are undoubtedly a great strategic fit."

Imperial Tobacco, headquartered in Bristol, England, is the world's fourth largest tobacco concern, dwarfed only by Altria, Japan Tobacco and BAT. It makes West, Lambert & Butler and Davidoff cigarettes and Classic machine-made cigars. The company had revenues of £11.7 billion ($24 billion) in 2006, with pre-tax profits of £1.1 billion ($2.3 billion). Its products are sold in more than 130 countries.

Altadis, which was formed in 1999 by the merger of France's SEITA S.A. and Spain's Tabacalera S.A., had sales of 4 billion euros ($5.5 billion) in 2006, 22 percent of which came from cigars. Cigarette sales from such brands as Gauloises and Ducados made up 43 percent of revenues, and logistics accounted for 30 percent. In addition to making its own cigars, Altadis owns half of Habanos S.A., the Havana-based distributor of Cuban cigars around the world, and owns a controlling interest in JR Cigars, America's leading retailer of cigars.

Imperial made its first offer for French/Spanish Altadis in March, when it pledged 45 euros per share for the company, which was quickly rejected by the Altadis board, as was a sweetened offer of 47 euros per share made soon after. Imperial threatened to go hostile with the bid, which Altadis labeled "opportunistic," citing its recent "temporarily depressed" financial results. Imperial said "the euro 47 per share represents a full and fair price for Altadis."

In May, a pair of private equity firms teamed up to make a larger offer for Altadis. CVC Capital Partners Limited and PAI Partners offered 50 euros per share for the company. PAI later withdrew its bid, and CVC was going to pursue the bid alone, according to Reuters.

There was little news regarding any deal until early this morning, European time, when Imperial said the Altadis board had accepted its increased offer of 50 euros per share. Altadis officials confirmed the deal, which needs approval by Altadis shareholders, who will be urged by the company's board to accept the offer so long as no higher bid emerges. The deal must also pass antitrust regulations before being finalized.

In the briefing, Davis spoke of how Altadis would benefit Imperial. "We're in 130 markets worldwide. If we look at their products in our markets, and our products in their markets, then I think there are substantial revenue benefits going forward, but we haven't quantified those," said Davis. Imperial said the acquisition would add 300 million euros ($414 million) to the bottom line, but Davis clarified that "the 300 million we talk about is all cost efficiencies," and didn't include the revenue benefits.

While cigarettes are a bigger part of the deal than cigars, Altadis's leading position in the cigar market is an attractive asset to Imperial, which is relatively weak in the cigar segment.

"The [Altadis] cigar portfolio is quite unique, and has great potential in both mature and emerging markets," said Davis. "I think the cigar opportunities are truly global. These [are] iconic brand names, very aspirational, almost luxury brand names known around the world."

The Altadis cigar business has two segments, Cuban and non-Cuban. The ownership of half of Habanos gives Altadis unparalleled rights to Cuba's renowned brand names in every market save for the United States. In addition, via its Fort Lauderdale, Florida, subsidiary Altadis U.S.A. Inc., the company makes the non-Cuban versions of many of those brands for sale in the lucrative U.S. cigar market. Altadis U.S.A. also has a considerable machine-made cigar business, with major brands including Backwoods.

Davis called the U.S. market "highly profitable" and said Altadis is ranked No. 1 in the U.S. cigar market "in sales volumes, revenues and profitability."

Change is inevitable with acquisitions, and when executives speak of synergy, that often means redundancy, and areas that can be eliminated for cost savings. Imperial says it will dispose of some non-core Altadis assets valued at 650 million euros ($897 million), including property and some of the company's logistics business.

While the corporate headquarters will be relocated to Bristol, England, where Imperial is located, the Altadis cigar business will stay in Madrid, Spain. "The cigar business has historically been headquartered in Madrid, it's where all the expertise is…I think it would be very destructive to move it from Madrid," said Davis. He also said Altadis CEO Antonio Vazquez will become CEO of the enlarged group's cigar and logistics business, and that Vazquez and Altadis chairman Jean-Dominique Comolli have been invited to join Imperial's board.

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