Shares in Imperial Tobacco (LSE: IMT) surged to a new all-time high yesterday after City analysts re-ignited speculation that one of the company’s peers could be about to make an offer for the group.
British American Tobacco (LSE: BATS) has been mentioned as one of the potential bidders for Imperial. But Imperial may be too big for British American to swallow whole without any help. This has led to speculation that some Imperial’s peers will get together and offer to buy separate parts of the company.
Breaking Imperial up would also help any potential bidders work their way around any anti-trust issues that may arise with regulators around the world.
Who is the buyer?
So, who could be interested in Imperial?
Well, it all comes down to market share. Imperial has a 16% share of the European tobacco market, closely followed by Japan Tobacco with an 18% share. British American has a 21% share of the European tobacco market, and Philip Morris controls 38% of the market. To get around anti-trust regulators, it’s likely that Japan Tobacco would make an offer for Imperial’s European operations.
Over in Russia, it’s Japan Tobacco that controls more than a third of the market. Imperial once again has a market share of 10% and British American comes close second with a market share of 21%. If British American were to make an offer for Imperial’s Russian operations, it would take the tobacco giant’s share of the market to 31%, in line with that of Philip Morris and Japan Tobacco.
In Indonesia, Imperial controls 28% of the tobacco market through its Gudang Garam subsidiary. Japan Tobacco has no exposure to the region, Philip Morris has a market share of 35% and British American controls 8% of the market. With this being the case, both Japan Tobacco and British American could be bidders for Imperial’s Indonesian assets.
The final major market, the US, is more complex than any other. Indeed, the market has three main players, Reynolds American (32%), Altria (51%) and Imperial (10%). However, British American owns a majority stake in Reynolds American while Altria is essentially the US arm of Philip Morris. Japan Tobacco has no exposure to the region.
All in all, it looks as if British America and Japan Tobacco are Imperial’s most likely suitors, based on current market share information.
Time to buy?
Investors shouldn’t rush to buy Imperial’s shares on the speculation that the company may be taken over at some point in the future. Takeover rumours rarely have any weight behind them, and Imperial has been the subject of such rumours for more than two decades.
What’s more, Imperial’s shares are now more expensive than they have been for a long time. The shares currently trade at a forward P/E of 16.3, compared to the five-year average of 12.6.
Still, for income investors, Imperial could be a decent investment at present levels as the company’s shares support a dividend yield of 3.9%.
