BAT said the acquisition of Barcelona-based Cigarerra La Moderna (CLM), part of the seeds and packaging combine Empresas La Moderna, would give it over 50 per cent of the Mexican market.
Mexico is the world's 15th largest tobacco-selling market, with sales of more than 47 billion cigarettes a year. CLM's only rival is Cigatam, which is 50 per cent owned by Philip Morris and which has a 45 per cent market share. Martin Broughton, BAT's chief executive said: "I wish there were more opportunities like this. This offers us the rare opportunity to buy a sizeable and very profitable player in a growth market."
CLM owns three of the top five brands in Mexico - Boots, Raleigh and Montana. The move will also increase BAT's stranglehold on the Latin American cigarette market, where it currently has a 60 per cent market share.
Analysts agreed that a move into Mexico made sense, but some were concerned about the timing of the deal, which follows just weeks after the US tobacco industry agreed a tentative $368bn settlement against future tobacco litigation. Mark Duffy analysts at SBC Warburg said: "This is fine strategically, but it's an odd time given that BAT doesn't know how much it will be spending on US litigation."
Another analyst said: "Cigarettes will become increasingly litigation riddled outside the US, but BAT seems to be putting on a brave face and saying there's still life in tobacco."
However, Michael Prideaux, a spokesman for BAT insisted that it is business as usual: "Our company doesn't stand still just because difficult things are happening in the US."
The deal, which BAT believes will add $140m to its tobacco profits, which reached pounds 245m in 1996 and will be broadly earnings neutral in the first full year, takes the company into a fast-growing and litigation- free new market. Mr Prideaux said: "US style litigation is not likely to cross the river. Smoking related litigation is very rare in Mexico. There is less incentive to litigate as there are no punitive damages. The causal link between someone causing an injury and the injured is also harder to prove." The Mexican economy has also stabilised over the last few years, with consumer spending recovering and GDP forecast to grow at 3 per cent a year over the next ten years. According to Mr Prideaux GDP is the main driver of sales of branded cigarettes. BAT, also has the option of using 15 billion cigarette spare capacity at the CLM plant to export.
Empresas La Moderna was previously owned and managed by BAT, but during the 1970's, the group was required to reduce its shareholding to 50 per cent by legislation restricting all foreign investment in Mexico. The minority was finally sold in 1989. According to one analyst: "This is a good buy. BAT knows this business and market already. And now is a good time to get into the market." Philip Morris recently increased its stake in Cigatam from 29 per cent to 50 per cent.
The terms of the deal, which comprises $1bn in cash, a $500m loan note and $212m debt, involves BAT taking a 50 per cent share now with the option to take full control at no extra cost. Full control is likely by the end of this year. The deal pushes up BAT's gearing from around 40 per cent currently to over 60 per cent. BAT's share of any US litigation settlement would take that to over 80 per cent.
However, the company was not worried by the level of debt. "We've been there before when we bought Farmers. Interest cover will still be comfortable."Reuse content