Cuban Cigars "Made in UK" ?
Imperial Tobacco boss to woo Castro
over bid for cigar company

By Robin Pagnamenta
Gareth Davies, chief executive of Imperial Tobacco (the largest tobacco manufacturer in the UK), will travel to Cuba to woo Fidel Castro’s Government after a board recommendation of the group’s €12.6 billion (£8.5 billion) offer to acquire Altadis, the Franco-Spanish tobacco company, announced yesterday.

Mr Davies hopes to secure Cuban government support for the deal and persuade it not to exercise a change of control clause that it holds over Corporación Habanos, a 50-50 joint venture which Altadis operates in Cuba that owns the country’s most famous cigar brands, including Montecristo, Cohiba, Romeo y Julieta and Partagas.

Mr Davies said yesterday the proposed entry of Habanos into 50 per cent British ownership would represent a “great addition” to Imperial’s existing portfolio of cigarette brands, including Lambert & Butler, Superkings and Embassy.

He said he planned to visit Cuba “in the not too distant future” with Antonio Vázquez, the Altadis chief executive, who will retain a role in the new organisation, assuming that Imperial’s €50 per share offer is approved by shareholders.

Mr Davies, who will continue to head the enlarged group from Imperial’s headquarters in Bristol, is expected to meet with Habanos executives as well as senior figures in the Castro administration. “We are hopeful that the change of control clause will not be exercised,” Mr Davies said.

“We hope this joint venture will continue to go from strength to strength – it’s a business we plan to invest in.” Mr Davies said he saw considerable opportunities to market Habanos “luxury brands” in the Far East, Eastern Europe and the former Soviet Union, and predicted that there would be “considerable upside” in the event of an end to a US trade embargo against Cuban products.

Altadis, which also owns cigarette brands such as Gitanes, Gauloises and Ducados, is the world’s largest cigar group and also owns non-Cuban mass-market cigar brands such as Phillies, Backwoods and Dutch Masters.

The company’s cigar business generated €888 million in sales last year or 22 per cent of Altadis’s €4 billion of total sales. The bulk of the Madrid-based operation’s sales are in cigarettes, which generated 43 per cent of revenues last year.

Logista, its distribution arm, accounted for the remainder, but Imperial is believed to be considering a sale of this business. A range of private equity firms, including CVC, PAI, Cinven and Carlyle Group, are understood to be interested.

Mr Davies said that there were significant opportunities for cross-selling both companies’ cigarette brands in new markets, and extending them with the launch of slim or extra long varieties. He said he hoped the combination would allow for annual cost savings of €300 million.

The takeover, to be funded with a mixture of debt and a £5 billion rights issue, will cement Imperial’s position as the fourth largest player in the global tobacco business after Philip Morris International – the US owner of Marlboro – Lucky Strike-owner British American Tobacco, and Japan’s JTI, which recently acquired Britain’s Gallaher. The proposed new group would also have a stronger presence in markets such as Morocco, Spain, France, Russia and Germany.

A spokeswoman for CVC Capital Partners, which had earlier submitted a €50-per-share bid of its own only to struggle raising finance, said the group would adopt a wait and see approach.


Imperial Tobacco targets US with $1.9bn deal

The British group is buying Commonwealth Brands,
America's fourth largest cigarette maker

By Dearbail Jordan
Imperial Tobacco revealed the real reason behind a decision to suspend its £600 million annual share buyback scheme by announcing the $1.9 billion acquisition of US cigarette maker Commonwealth Brands.

The British company is buying America's fourth largest cigarette producer from Houchens Industries, a US conglomerate which is the country's biggest employee-owned business. The deal is expected to complete in April this year. The acquisition will significantly boost Imperial Tobacco's footprint in the US, where it owns cigarette paper manufacturer Robert Burton Associates.

Imperial Tobacco had intended to grow organically in the region, earmarking $20 million a year to expand its presence by increasing its staff from 40 to 200, but the company has chosen instead to grow through acquisition. However, the market reacted negatively to this morning's announcement, sending shares down 1.61 per cent, or 36p, to 21.95p.

Last month, speculation heightened that Imperial Tobacco, which makes John Player Special and Embassy cigarettes, was set to be taken over after the company refused to update the market on the status of its buyback programme, which was suspended in December after rival UK company Gallaher, said it had received a £7.5 billion approach from Japan Tobacco.

Robert Dyrbus, finance director at Imperial Tobacco, said it was likely that buybacks would resume in the second half of next year when the company will review its financial position after increasing its current £3.8 billion debt facility by £1 billion to acquire Commonwealth Brands.

Gareth Davis, chief executive at Imperial Tobacco, said the company is planning to launch a range of new tobacco brands in the US, which could eventually be rolled out across the rest of its global operations, but declined to divulge details of the products because of market sensitivity. He added that he does not expect to make any job cuts at Commonwealth Brands.

Commonwealth Brands holds 3.7 per cent of the American cigarette market, and owns brands including USA Gold and Sonoma. In the year ended September 30, 2006, it reported pre-tax profits of £30 million on £178 million in revenue. In its last financial year it produced 14 billion cigarettes, but has the capacity to manufacture 20 billion per annum.


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