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Imperial Tobacco Group PLC Hits All-Time High On Takeover Speculation. Should You Jump In?

Imperial Tobacco (LSE: IMT) hit an all-time high yesterday as the company once again become the subject of takeover chatter.

The chatter originated from Goldman Sachs, which reignited long-standing speculation that Imperial could fall prey to a larger peer, after speaking with the company’s management. 

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Imperial has been the subject of takeover speculation for years now but recently bid chatter has died down as the company’s performance has lagged that of its peers.

However, after taking a look at the company, Goldman believes that real changes are taking at Imperial as the group has refocused its growth efforts on several key markets including Italy, Australia and the US, which could potentially disrupt the company’s larger peers.

Wider industry consolidation
british american tobacco / imperial tobacco

Imperial is not alone as recently there has been plenty of speculation that the tobacco industry could be about to see a wave of consolidation.

Takeover speculation started earlier this year, when inside sources revealed that US tobacco company, Reynolds American was considering a buyout of smaller domestic peer, Lorillard. However, Reynolds is nearly 50% owned by British American Tobacco so, any deal would have to get British American’s ok.

What’s more, when British American originally acquired its stake in Reynolds ten years ago, the company signed a stand-still agreement, preventing the company from increasing its holding for ten years.

The standstill agreement expires later this year, which has sparked further chatter that British American could bid for Reynolds, as at present, British American has almost no exposure to the US cigarette market; aside from the company’s Reynolds stake. 

Perfectly placed

So, there is plenty of scope for consolidation within the tobacco industry but where does Imperial fit into all of this?

Well, unlike the majority of its international peers, Imperial does have exposure to the US tobacco market. The company acquired the US’ fourth largest cigarette company, Commonwealth Brands several years ago and is currently trying to drive sales within the region. Imperial’s drive for growth within the US market has itself, given rise to speculation that Imperial could bid for Lorillard.

But Imperial is the company that looks most susceptible to a buyout.

With operations around the world that include both tobacco and logistics, it is believed that Imperial could make a juicy snack for a larger peer. It is unlikely, however, that the company will be taken over whole. Instead, analysts believe that Imperial will be brought out by a consortium of its larger peers such as British American, Philip Morris International, and Japan Tobacco.

The reasoning behind this belief is simple: Philip Morris International is unlikely to want Imperial’s US business, but its distribution network within Asia and Europe is attractive. Meanwhile, British American could be interested in Imperial’s US business while Japan Tobacco would be interested in acquiring Imperial’s operations within Europe to increase its exposure on the continent.

Foolish Summary

So all in all, with so many attractive assets and a global presence, Imperial looks to be an attractive target and bid chatter is getting louder; it might be worth taking a look at the company. 

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Rupert owns shares in Imperial Tobacco.