Imperial Tobacco rolls out pounds 185m offer for Rizla

Imperial Tobacco, the Embassy cigarettes to Golden Virginia tobacco group, is set to dominate the world market for hand-rolling cigarette papers after spending pounds 185m to acquire Rizla, the world's leading brand and one of the oldest names in the tobacco industry.

The deal, the group's first since being demerged from the Hanson conglomerate in October, will strengthen Imperial's position in the handrolling market, where Golden Virginia already commands 60 per cent of legitimate tobacco sales.

Since 1993 and the opening up of the single European market, handrolling has become one of the most dynamic parts of the UK tobacco industry as illegal importers have exploited much lower duty rates on the Continent. Around 60 per cent of the UK market is believed to be supplied by product smuggled in from the Continent, including re-exported British brands such as Golden Virginia and Gallaher's Old Holborn. With a 50-gram tin of handrolling tobacco selling for around pounds 2 in Belgium, the cost is roughly a quarter of the level in the domestic market.

That has helped boost the UK market for handrolling tobacco, which has been growing at around 7 to 8 per cent a year since 1993, against a 2.5 per cent per annum fall in sales of factory-made cigarettes.

Imperial beat off several other interested parties to capture Rizla, based in Breda in Holland, but founded in France in 1796. It was acquired in 1994 by a group of institutional and trade investors led by UBS, the Swiss bank.

Gareth Davis, Imperial chief executive, said they had been eyeing the group for around five years, but serious negotiations only started two months ago after they were "made aware" it was for sale. "Rizla is a company we have watched with great interest for quite some time, but last year we were totally absorbed by the demerger process," he commented.

There was "significant potential" to increase productivity and profitability of the business, which has seen trading profits rise from pounds 17m on sales of pounds 65m to pounds 23m on a turnover of pounds 74m in the three years to December. The deal would be earnings-enhancing in the first year, he said.

There were also significant opportunities for synergies. Both Rizla's papers and Golden Virginia are sold through similar outlets in the UK, offering the chance for savings on distribution costs. Rizla, which claims two-thirds of the world market for handrolling tobacco papers, also widened Imperial's presence in Europe.