Imperial in £1bn swoop on discount US tobacco firm

Imperial Tobacco surprised the market yesterday with a $1.9bn (£970m) acquisition of a US discount cigarette maker in a move that catapulted it into the No 4 position in the country.

The maker of Lambert & Butler and Richmond cigarettes announced an agreed deal to acquire Commonwealth Brands, the maker of USA Gold and Sonoma, from Houchens Industries.

Analysts said the acquisition made good financial sense, but Imperial's shares fell 3 per cent as investors noted that it makes a tie-up with a larger player far less likely.

After Japan Tobacco's £7.5bn swoop on Gallaher at the end of last year, speculation has been rife that Imperial Tobacco would be the next in line for consolidation and its shares have risen 28 per cent over the past year. The US giant Philip Morris International was understood to be interested in Imperial, while Imperial was said to be circling the Franco-Spanish company Altadis, the maker of the Gauloises and Fortuna cigarette brands.

Imperial announced a review of its share buy-back programme at its annual meeting in January, fuelling speculation it was about to make a major acquisition.

Andrew Darke, an analyst at Evolution Securities, said once the deal with Houchens was completed, it would pose a hurdle for Philip Morris. But he added that yesterday's announcement could smoke out a move from Philip Morris.

Imperial's chief executive, Gareth Davis, said the deal would create significant value for shareholders and added he was delighted to "finally have the US as a significant part of our international footprint".

Commonwealth Brands, based in Bowling Green, Kentucky, enjoys 3.7 per cent of the $376bn US cigarette market. It employs 720 people and manufactures 14 billion cigarettes a year, but has the capacity to make 30 billion.

According to Imperial, the US accounts for 30 to 40 per cent of the industry's global profits. On completion of the deal, it will become the firm's third-largest market after the UK and Germany. Imperial has warned the UK market may shrink by 4 per cent this year after the smoking ban is extended into England and Wales.