BAT Considers $3 Billion Buyout of Brazilian Minority Stake

British American Tobacco Plc is considering buying out the minority in its Brazilian unit Souza Cruz SA, a transaction that would cost the maker of Pall Mall and Dunhill cigarettes more than $3 billion.

BAT would pay 26.75 reais per share in cash for the 24.7 percent stake it doesn’t already own, according to statements released Monday by the companies. That’s about 13 percent above the Brazilian company’s closing price on Friday in Sao Paulo.

The acquisition would give the London-based cigarette maker full control over the largest tobacco company in Brazil, where it has a market share of about 78 percent. Such a deal, which BAT has considered before, would be “strategically attractive” as it would allow for better cooperation on new product development, spokesman Will Hill said by e-mail.

Souza Cruz, based in Rio de Janeiro, is “the jewel business in BAT,” said Erik Bloomquist, an analyst at Berenberg. A deal would be “easy to do with little objection likely from the Brazilian government, as there does not appear to be a lot of political capital to be maintained by remaining listed. Souza Cruz would remain a powerful corporate in Brazil.”

Souza Cruz shares rose 9.9 percent to 25.99 reais at 1:34 p.m. in Sao Paulo, valuing the company at about 39.7 billion reais ($13.8 billion). BAT shares gained 2 percent to 3,727.5 pence at the close of trading in London.

Declining Volume

BAT, which is being advised by Deutsche Bank AG and UBS Group AG, said there’s no certainty an offer will be made.

Brazil is BAT’s biggest market, accounting for about 12 percent of operating profit, according to Exane BNP Paribas.

The company’s shipments in the country declined in the first half of last year amid a contracting market that researcher Euromonitor estimates was worth $11.4 billion in 2013. Profit also dropped in the region as a result of the lower volume and adverse exchange-rate movements. Only 12.6 percent of Brazilians smoke, according to data compiled by Bloomberg Intelligence, one of the lowest rates in Latin America.

The subject of the Souza Cruz minority has vexed BAT executives for some time. The U.K. company said in 2006 that it was considering buying out the unit, which was previously run by BAT Chief Executive Officer Nicandro Durante. He is both Brazilian and Italian.

Souza Cruz traces its roots back to 1903, when 32-year-old Portuguese immigrant Albino Souza Cruz and 16 employees began to produce cigarettes under the Dalila brand in Rio de Janeiro. To expand the company further, Souza Cruz transferred control to BAT in 1914 and served as chairman until 1962, two years before he died. Today, Brazil is the sixth-largest cigarette market in the world.

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