BAT's £366m bid for Serbian tobacco giant beaten by rival

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British American Tobacco was trumped yesterday in its attempt to buy Serbia's biggest tobacco manufacturer by its arch-rival Philip Morris. The US group, part of Altria, bid ¤519m (£366m) for Duvanska Industrija Nis (DIN), in Serbia's biggest privatisation deal since its former leader Slobodan Milosevic was ousted from power almost three years ago.

BAT, the world's number two tobacco player behind Philip Morris, was left with Serbia's smaller cigarette manufacturer ­ Duvanska Industrija Vranje (DIV) ­ by way of consolation prize in a deal worth ¤87m. The UK company's bid for DIN was the lowest of the three groups vying for control of a company that controls 62 per cent of the Serbian cigarette market and produces 50 million cigarettes a day. It bid just ¤235m, behind a ¤307m offer tabled by a Croatian tobacco group.

BAT's bid for DIV, which accounts for 8 per cent of Serbia's cigarette market, comprised ¤50m for the shares and ¤24m to modernise the factory over the next three years. The UK company also agreed to invest a further ¤13.4m into a social programme for the factory's 500 employees, who live in Vranje, a town 350 kilometres south of Belgrade.

The government said a clampdown on cigarette smuggling, which thrived during President Milosevic's turbulent rule, had contributed to a higher-than-expected price for stakes in the two tobacco companies. "Offers like this show that Serbia has made an express journey from a smugglers' paradise to an orderly market in only two and a half years," Bozidar Djelic, Serbia's finance minister, said as he announced the outcome of the tender process first started in April. Philip Morris's bid for DIN includes ¤64.9m for a five-year investment programme and ¤59.11m for a social programme.

Mr Djelic said the price for the two producers, which together cover 63 per cent of the domestic market, sent a good message to other foreign investors. "The high price and the arrival of two world industry majors is a signal ... that international businesses and politicians believe in Serbia's ... future," he added. The deal comes just weeks after BAT, which is chaired by Martin Broughton, bid ¤2.3bn to acquire the Italian tobacco group ETI.