KKR may thwart £7.6bn Imperial bid

Imperial Tobacco, the UK's largest cigarette company, has tabled a £7.6bn offer for the Franco-Spanish group Altadis after months of speculation that the two would merge.

Shares in Imperial, which makes Lambert & Butler and Richmond cigarettes, surged 9 per cent on the news that is had made a €45-a-share approach to Altadis, the maker of Fortuna and Gauloises cigarettes.

Shares in Altadis were suspended in Madrid before the announcement but later jumped 19 per cent when trading resumed. Altadis said the unsolicited offer was dependent on approval of the board, which is to meet in the next few days to discuss the company's future.

The private equity house Kohlberg Kravis Roberts is also understood to have an interest in Altadis and there has been speculation that a friendly merger between the two tobacco companies could fend off a hostile bid from KKR.

Imperial, which is the world's fourth-largest tobacco company after US giant Philip Morris International, British American Tobacco and Japan Tobacco, said a merger would create significant value for shareholders. "This would be a powerful combination," a spokesman said. It would extend Imperial's geographic reach and lead to significant growth opportunities, he said. Discussions are at an early stage and there can be no certainty an approach will be made, he added.

Analysts said a merger would make strategic sense. It is estimated Imperial could make at least £185m in potential annual cost savings from a tie-up. Jeremy Batstone, an analyst at Charles Stanley, said a recent restructuring at Altadis of its European logistics and US cigar activities had made it "a more viable acquisition target".

JP Morgan said the offer was a fair price "to start discussion" but said that Imperial is likely to have to pay more. However, some analysts were surprised at the move given that BAT recently ruled out making any acquisitions on the basis that current prices are overvalued. One analyst said he did not believe the kind of bid price premiums needed to attract a friendly deal "would produce attractive financial returns" to any strategic acquirer.

Altadis itself has repeatedly said it sees itself as a buyer of assets, not a takeover target, and has also said it has no plans to separate its three units.

The markets have been swirling with rumours of a tie-up between the two companies for more than two years. And after Japan Tobacco's £7.5bn swoop on Gallaher at the end of last year, analysts predicted it was the start of a wave of consolidation. In January, Imperial Tobacco announced a review of its share buy-back programme at its annual general meeting, fuelling talk that it was finally ready to pounce. It halted its buy-back programme in December and analysts suggested it was husbanding resources before a bid. However, if Imperial fails in a bid it could itself be taken out by bigger rivals Philip Morris or BAT.

The global tobacco industry, which is worth more than $380bn, has seen a steady decline in its Western markets due to increasing regulation and greater health awareness. This has led to tobacco companies looking for ways to grow through acquisitions as a faster way of growing market share than through introducing their own brands into new markets.

Imperial has warned that the UK market may shrink by 4 per cent this year after the smoking ban is extended into England and Wales.

In February, Imperial Tobacco snapped up US discount cigarette maker Commonwealth Brands for $1.9bn in a surprise move.