BAT to Acquire Most of Denmark's ST for $4.1 Billion

Source from:  By Thomas Mulier Feb. 28 (Bloomberg) 02/29/2008

British American Tobacco Plc, the maker of Lucky Strikes, agreed to buy most of Skandinavisk Tobakskompagni A/S for $4.1 billion, gaining 60 percent of the market for cigarettes in Scandinavia. BAT said today it will pay 20.3 billion Danish kroner for ST units including Prince cigarettes and Fiedler & Lundgren, the Swedish maker of snus powdered tobacco. London-based BAT already owned 32 percent of Soeborg, Denmark-based ST. The takeover of ST, whose roots date back 258 years, will save BAT 60 million pounds annually by 2011 and give the company a bigger foothold in the $2 billion-plus market for snus. It's the second purchase unveiled by BAT this month, following last week's $1.72 billion bid for Turkey's Tekel. At least $42 billion of tobacco mergers in a year have reduced competition, allowing price increases in a shrinking European cigarette market. ST gives BAT ``a leading and profitable market share in Scandinavia,'' said Bruce Davidson, an analyst at Blue Oar Securities in London. ``It's almost always better to hold 100 percent of a business than 32 percent. Snus is a useful by- product of the deal.'' London-based BAT, the world's second-largest publicly traded cigarette maker, also reported full-year profit rose 12 percent to 2.13 billion pounds ($4.2 billion), below the 2.17 billion- pound median of 10 analyst estimates in a Bloomberg survey. BAT slipped 9 pence, or 0.5 percent, to 1,930 pence at 1 p.m. in London trading today, erasing an earlier 3.9 percent advance. The company repeated that Cie. Financiere Richemont SA and Remgro Ltd. will probably distribute their 30 percent stake to its own investors, damping speculation about a sale. House of Prince Shares of BAT, whose other brands include Kent and Dunhill, added 38 percent in 2007, more than the 17 percent gain by larger rival Altria Group Inc., the maker of Marlboro cigarettes. Skandinavisk Holding, ST's controlling shareholder with 64.7 percent, will retain cigar and pipe tobacco businesses and other units including a Copenhagen amusement park. BAT is paying Skandinavisk Holding 11.3 billion kroner, or 1.15 billion pounds. ST was formed in 1961 by the merger of three Danish tobacco makers, including Chr. Augustinus Fabrikker, founded in 1750, according to the company's Web site. The company merged with a local BAT division in 1971, and its House of Prince is Scandinavia's largest cigarette company. ``We are relatively weak in Scandinavia, and what this acquisition does is transform our business'' in that market, BAT Chief Executive Paul Adams said in a Bloomberg Television interview. Charitable Foundation A white-and-gold pack of Prince cigarettes costs 32.50 kroner in Denmark, the same price as Marlboros. Skandinavisk Holding is 50-percent owned by Denmark's Augustinus Foundation, which supports artistic causes and provides grants for students studying arts abroad. The C.W. Obel investment company holds 35 percent, while the billionaire Faerch family owns the remaining 15 percent. The Faerches are selling their stake to the Obel and Augustinus families as part of the transaction. Denmark's Berlingske newspaper says Lone Faerch, a fifth-generation heiress, is the Augustus Foundation's ``top figure.'' The Danish company reported sales of 42 billion kroner for fiscal 2007, up 4.7 percent from the year-earlier period. Net income rose 4.5 percent to 1.6 billion kroner. BAT approached ST and negotiations began in early January, Joergen Tandrup, the chairman of Skandinavisk Holding, said at a press conference. Relative Value BAT said it's paying 11.2 times 2007 earnings before interest, tax, depreciation and amortization. That's less than other recent deals: Imperial Tobacco Group Plc paid 14.2 times Altadis SA's operating profit, and Japan Tobacco Inc. paid about 13.6 times Gallaher Group Plc's operating profit. ST's Fiedler unit sells 6 percent of the snuff in Sweden and 4 percent in Norway. ``This is another good acquisition for BAT,'' said Tina Cook, an analyst at Charles Stanley in London. ``Smokeless tobacco products such as snus continue to be popular in Sweden, and are gaining ground on the back of tighter smoking restrictions across Scandinavia.'' Snus is placed between the upper lip and gums rather than sniffed. The industry lobbied the European Union to lift a ban on snus sales outside Sweden, seeking growth from smokers wanting another way to ingest nicotine amid smoking bans. The EU ruled earlier this month that snus hasn't been proven to help smokers quit, dealing a blow to those efforts. Tobacco Takeovers BAT's full-year sales gained 2.6 percent to 10 billion pounds, more than the survey's 9.87 billion-pound median estimate. Profit from operations rose 11 percent to 2.91 billion pounds, less than the 2.99 billion pounds analysts estimated. While sales are ebbing in developed markets, more people are smoking in emerging markets, helping BAT stock triple over the past five years. The Tekel purchase gave the company access to a market where 60 percent of adult males smoke. Other recent industry takeovers include Japan Tobacco Inc.'s purchase of Gallaher Group Plc. The company aims to reach annual savings of 800 million pounds by 2012, above analysts' 580 million-pound median estimate. The company also cut its share buyback target this year to 400 million pounds. BAT has cut 1 billion pounds of costs in the past five years, no longer has any U.K. factories and is scheduled to shut a Dutch plant this year. England prohibited smoking inside public places in July, and France and the Netherlands are tightening restrictions this year. Tobacco use will kill 1 billion people this century, a 10-fold increase over the previous 100 years, unless governments in poor nations raise taxes on consumption and mandate health warnings, the World Health Organization says. Chief Financial Officer Paul Rayner will retire April 30 and return to Australia for ``family reasons,'' BAT also said. Ben Stevens, BAT's European regional director, will succeed him. Deutsche Bank AG advised BAT in the purchase. The tobacco maker also plans to increase its dividend 18 percent this year to 66.20 pence a share. To contact the reporter on this story: Thomas Mulier in Madrid at tmulier@bloomberg.net. Enditem