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A Tobacco Giant Arises in Europe

Cigarette makers Altadis and British Imperial are mulling a merger. If they combine, the new company will be No. 4 worldwide

Editor's note: This is an updated version of a previously published story.

Shares of Franco-Spanish tobacco company Altadis climbed more than 16% on the London Stock Exchange Mar. 15, to £31.01 ($59.85), after the British Imperial Tobacco Group made an approach the previous evening for a possible merger. The tentative offer of €45 ($58.95) per share of Altadis would make the bid worth about €11.5 billion ($15.2 billion). Analysts say they have anticipated the move for months and expect it to be approved fairly swiftly.

Unconfirmed news reports on Mar. 16, however, suggested Imperial (ITY) may face one or more counter-offers in its bid for Altadis, most likely from London-based rival British American Tobacco (BTI). Other reports said American private equity powerhouse Kohlberg Kravis Roberts also might be interested in buying Altadis, or that Altadis could try to turn the tables and buy Imperial. All the speculation helped lift Imperial shares by nearly 6% in New York trading on Mar. 16.

A merger of Altadis and Imperial would follow a general industry trend in recent years toward consolidation, highlighted most recently by Japan Tobacco's buyout of British cigarette maker Gallaher Group (GLH) in December, 2006, for $19 billion (see, 12/7/06, "Takeover Talk Sparks Gallaher Shares," and 12/15/06, "Japan Inc.'s Buying Tour Reaches Britain").

"This is an industry where volumes are decreasing, and we see an excess capacity of production," says Ignacio Romero, an equity research analyst with Ibersecurities in Madrid. He says the major cigarette makers, anticipating further difficulties in coming years, are eager to achieve greater cost synergies, particularly on purchasing, sales, and marketing.

Taxes and Bans

Altadis, which makes the quintessentially French brands Gauloises and Gitanes, has proved particularly vulnerable to industry troubles of late. Lower volumes forced the company to close plants in Russia, Morocco, France, and Spain in the last four years, and it has announced plans to close its Spanish plants in Sevilla and Tarragona during 2007.

The company posted a 21% decrease in net income last year, to just €453 million ($597 million), due in part to harsher cigarette taxes in Spain and the effects of the country's nationwide ban on smoking in public settings. Recent difficulties—and a long-awaited tightening of French anti-smoking laws—might make a merger with Imperial more attractive to shareholders.

Imperial and Altadis together would become the fourth-biggest global tobacco company, with strong positions in four European markets. Altadis, which also owns Cohiba and H. Upmann cigars and Fortuna cigarettes, enjoys about 30% market share each in Spain and France, according to Ibersecurities. Imperial, whose leading brands include Davidoff, West, and Peter Stuyvesant, holds more than 20% market share in Germany and 42% in Britain. Imperial shares rose 8.6% in London on Mar. 15 and were up 7.3% in New York trading.

Romero says if Altadis shareholders accept the bid, it will probably end the consolidation wave. "With these four global players [including Altria Group (MO), British American Tobacco, and Japan Tobacco]," he says, "it would be difficult to have a combination of two of those four players without raising serious competition issues."

Carlin is a reporter in BusinessWeek's Paris bureau.

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