Replies to post #1082 on Altria Group Inc (MO)

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More Acquisitions in Tobacco Industry?
Tuesday February 13, 12:27 pm ET
By Vinnee Tong, AP Business Writer
Citigroup Thinks Imperial Acquisition of Commonwealth Could Bring More Consolidation

NEW YORK (AP) -- The proposed $1.9 billion takeover of Commonwealth Brands by Imperial Tobacco Group PLC opens the door to more acquisitions, most likely in a year's time, according to Citigroup analysts.
"Now that Imperial has blazed a trail, you could well see more acquisitions," London-based Citigroup tobacco analyst Adam Spielman said on a conference call Tuesday.

But Spielman, as well as Citigroup's U.S. tobacco analyst, Bonnie Herzog, said the Commonwealth acquisition could delay any others for another 12 months, when more deals were expected within the next quarter. The Imperial deal complicates the acquisitions situation for any potential suitors, Spielman said.

Herzog said the deal is a validation that the litigation environment for tobacco companies has improved and a sign that other non-American manufacturers could follow Imperial into the highly profitable U.S. market. Imperial owns the premium Davidoff brand and its purchase of Commonwealth gives it a distribution system in the U.S. market.

Tobacco makers have been more optimistic that litigation risks are abating. The greatest evidence of this is the announcement by Altria Group Inc., owner of Philip Morris USA and Philip Morris International, that it would spin off Kraft Foods next month.

The distribution of Altria's remaining majority stake in Kraft Foods Inc. is the first step in a restructuring plan to break Altria into three pieces, with a split of its domestic and international cigarette divisions to follow. Herzog expects that break-up to happen later this year.

The Philip Morris units are unlikely candidates to buy Imperial, the analysts said. Philip Morris USA could face antitrust concerns while PM International is more focused on emerging markets, such as China. A more likely buyer was British American Group PLC.

Imperial said on Feb. 8 it would buy Commonwealth Brands Inc. from Kentucky-based Houchens Industries Inc. Spielman called it "a good deal for Imperial." At the time of the announcement, Imperial noted that Commonwealth brands, created in the 1990s, have never lost a smoking-related lawsuit and have never been named in a class-action lawsuit.

Commonwealth is the fourth-largest cigarette maker in the U.S. The biggest are Philip Morris USA, Winston-Salem, N.C.-based Reynolds American Inc. and Carolina Group, which is owned by the New York-based Loews conglomerate. Carolina Group makes Newport and Kent cigarettes under the Lorillard brand.

Spielman and Herzog said that out of the three major U.S. cigarette makers, Imperial's entry into the U.S. market most likely hurts Reynolds since it is most invested in the discount market. Reynolds, which has about 13 percent of the U.S. market, sells Camel, Kool and Pall Mall brands.

"They are likely the ones that could lose some share," Herzog said.

Commonwealth makes discount cigarettes USA Gold and Sonoma.

American Depositary Shares of Imperial Tobacco rose 18 cents to $86 in midday trading on the New York Stock Exchange.