British American Tobacco (BATS) is to acquire Productora Tabacalera de Colombia, or Protabaco, for £452 million. We think acquisitions of this nature are a sensible strategy, and we applaud the firm for paying a reasonable price. The deal is likely to contribute to solid medium-term growth in Latin America but does not have an impact on our fair value estimate.
Five months ago, Philip Morris International (PM) withdrew from a deal to acquire Protabaco after the government raised objections on antitrust grounds. Philip Morris already has a 51% share of the Colombian market, well above British American with 20% and Protabaco with 13%. With one major competitor out of the running, British American has pounced, striking a deal that will propel it to the number-two player in Colombia. At just over 11 times 2010 EBITDA, the acquisition price seems reasonable. While US firms trade at slightly lower multiples, developed markets are in decline, whereas emerging markets continue to offer volume growth opportunities because selling and marketing restrictions are more lax, so a slightly higher multiple is justified.
While we think Lorillard (LO) and Imperial Tobacco (IMT) may come into play over the next few quarters, we expect most merger and acquisition activity in tobacco to involve the global manufacturers acquiring local players in emerging markets, similar to this acquisition of Protabaco. We are not surprised to see British American make a move in Latin America, where it is dominant in most markets and may be able to leverage some fixed costs. However, we expect most of the activity in the coming months to centre on North Africa and Asia, where governments may be loosening their control of nationalised tobacco industries.
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