CVC and PAI likely to push Imperial out

Imperial Tobacco looks likely to be pushed out of the race for Altadis following a long awaited €12.8bn offer from private equity firms CVC and PAI for the Spanish tobacco company.

The Altadis board reportedly feels that CVC and PAI Partners’ €50 per share preliminary offer is closer to matching the group’s “real value” than the €47 approach made by Imperial Tobacco in April.

That said, Altadis today announced the decision to authorise due diligence by the two groups without formally backing either offer.

However, CVC and PAI Partners will have access to all of Altadis’s books, while Imperial will only be provided with requested information. It is reported that Altadis is hoping that the private equity approach will trigger a bidding war.

But according to Charles Manso de Zuniga, a research analyst at Dresdner Kleinwort: “We doubt Imperial will be pushed into a bidding war. We can just about make the maths work for Imperial at €53 per share but only with very generous assumptions. The chances are increasing that Imperial may bow out of this one as we don’t think it will be pushed into a corner.”

He argues that Imperial’s acquisition of Reemtsma was a “must have” whereas the Altadis is only a “love to have” opportunity. The private equity led consortium on the other hand could bid up to as much as €60 a share.

“If equity IRRs of 10% are acceptable to private equity, then we can see a bid of €60 as plausible as long as exit multiples of 12x Ebitda can be achieved,” says Manso de Zuniga. “Historically, tobacco assets have been acquired at 12x and we imagine this must be the multiple that private equity is hoping for.”

However, on the downside, he adds: “A risk is that private equity’s rigorous financial discipline constrains Altadis’s performance in its marketplaces, leading to market share erosion. If this was too severe, potential exit multiples could suffer.”

At €50 a share the IIR is estimated at 16–20 per cent on exit multiples of 12x on €60 a share, the equity IRR is still 10%.

Aside from the higher price being offered it is also thought that the preference for the private equity bid lies in the fact that CVC and PAI have promised not to break up the group, and in the fact that they are also likely to retain the management team.

Despite this, some industry commentators are less certain of the business being kept in one piece. As well as making cigarettes, Altadis has a 50% interest in leading duty free retailer Aldeasa and is one of the leading importers of Cuban cigars into Europe.

Jose Luis Blanco of international law firm Latham & Watkins said this might make the chances of a US private equity firm such as KKR joining up with industry rival British American Tobacco to make an offer for Altadis an unlikely move.

But he added: “This is a two to three tier deal, with several transactions resulting from a possible break up of Altadis.”

Altadis’s cigar business might be in “a very good position” if the Cuban state owned cigar company was ever fully privatised, said Blanco.

British American Tobacco is also reported to be still interested and has appointed UBS and HSBC to advise on a potential bid.

And according to says Manso de Zuniga at Dresdner Kleinwort: “Private equity would need to ensure that all important co-operative agreements between Altadis and other industry players are not at risk of being terminated on change of control [eg, the German marketing agreement with BAT]. One option open to private equity to reduce costs could be to outsource cigarette production entirely perhaps to BAT,” it said.

PAI and CVC are already thought to be in advanced talks with Calyon, Societe Generale, Royal Bank of Scotland and ING to finance their bid.

Sandrine Bradley