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BAT wins auction for Turkey's state tobacco firm with $1.72bn bid

British American Tobacco has agreed to pay $1.72bn (£870m) to buy Tekel, Turkey's state-owned cigarette maker, in a move which will pit it against Philip Morris International in the world's eighth largest tobacco market.

After a live auction on Turkish television, the maker of Lucky Strike was named as the winner, beating bids from Citigroup Venture Capital International, the private-equity firm Cinven and Turkey's Dogan Sirketler Grubu Holding.

In scenes reminiscent of Pop Idol, sealed bids were handed in and opened on national television with the lowest bidder – initially Dogan Holding – asked to leave the room, although all representatives decided to stay to watch the outcome.

The auction was the third attempt to sell Tekel under a $10bn International Monetary Fund loan accord which aims to cut the state's role in the economy.

Sixty per cent of Turkish men smoke, making it an attractive market for BAT, which does most of its business in emerging markets.

BAT's chief executive Paul Adams said: "This investment, coupled with the country's rapid economic growth, will transform our position in the world's eighth-largest tobacco market."

The price is towards the high end of market expectations, as Tekel had been valued at between $1.5bn and $1.8bn. Analysts put this down to the fact that four bidders were taking part in the competitive auction.

Shares in BAT gained 16p to 1,874p.

BAT will have 36 per cent of the market in Turkey as it will add Tekel 2000 and 2001 to its existing brands, Kent and Vogue in the premium range and the lower-priced Pall Mall and Viceroy. This compares with the 41 per cent share held by the US giant Philip Morris.

Although smoking rates are falling in Turkey, the population is growing at nearly 2 per cent a year, and the economy is growing at 4 to 5 per cent a year.

A law banning smoking in public places, passed last month, will take effect in April, but bars, cafés and restaurants have 18 months to implement it.

BAT's investment director, Richard Hodgson, said the ban was taken into account when making the offer, and that the estimated fall in consumption would be less than 10 per cent.

Despite considerable consolidation within the industry over the past couple of years, Tekel is BAT's first major acquisition since it bought Italy's former state tobacco company in 2003. Japan Tobacco bought Gallaher at the end of 2006, and Imperial Tobacco acquired Altadis last year.

The deal is expected to be completed later this year, subject to competition regulators and Turkey's privatisation council.

Unions in Turkey were unhappy about the deal, and are concerned about the future of factories in Tokat and Bitlis.