UK-based tobacco producer British American Tobacco PLC (BTI, BATS.L) Friday said it won the bid for the cigarette business assets of government-owned Turkish tobacco company Tekel for US$ 1.72 billion. British American Tobacco expects the transaction to be accretive to earnings beginning 2009, while a projected deferred tax charge of GBP 20 million would likely dilute earnings in 2008.
The assets being acquired consist of rights to all of the cigarette brands of Tekel, two years of inventory and six manufacturing facilities. The transaction will raise British American Tobacco's market share in Turkey to about 36%, the eighth largest cigarette market in the world. The deal, once ratified by Turkey's Competition Board and the Turkish Privatization High Council, will be completed later in 2008.
British American Tobacco got the better of major rival bidders including the Citigroup Venture Capital International to strengthen its foothold in the Turkish cigarette market, which is currently dominated by Philip Morris International Inc. of the Latria Group.
In 2007, the Tekel assets generated earnings before interest, tax, depreciation and amortization of US$ 151 million. The combined entity is expected to generate annual synergies of nearly GBP 30 million by the third full year, helped by savings in administrative costs and an improved supply chain. However, the company expects to book an additional one-time cost of up to GBP 50 million in 2008, while realizing solid cash flows from enhanced working capital and disposal of assets.
British American Tobacco is yet to decide on staffing at the facilities being acquired, as the transaction financed by a bank facility, does not include employees.
Chief Executive of British American Tobacco Paul Adams commented, This investment, coupled with the country's rapid economic growth, will transform our position in the world's eighth largest cigarette market. The strength of Tekel's portfolio combined with our existing brands will provide a stronger platform for the growth in the market of our international brands, including Kent, Pall Mall and Vogue.
Earlier in 2003, an offer valued US$ 1.15 billion from Tokyo-based cigarette maker Japan Tobacco Inc. for Tekel was rejected by the Turkish government.
For its third quarter, British American Tobacco reported net profit of GBP 638 million, significantly higher than GBP 487 million recorded in the prior-year quarter. The company's third-quarter revenues came in at GBP 2.59 billion, up from GBP 2.44 billion last year.
In January, New York-based cigarette manufacturer Altria Group Inc. (MO) announced the commencement of a tender offer by its subsidiary Altria Finance Ltd. in connection with the company's planned spin-off of Philip Morris International.
Shares of BATS.L are trading at GBP 1,874.00 pence, up 0.86%, on a volume of 3.83 million on the London Stock Exchange.
BTI is currently trading at US$ 73.69, up US$ 0.79 or 1.08%, on a volume of 39 thousand shares on the American Express Stock Exchange. The Stock has been trading in a range of US$ 58.49 to US$ 81.04 for the past one year.
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