Turkey hopes it's third strike lucky in bid to sell off state cigarette giant

Britain's BAT and Imperial Tobacco are potential bidders as takeover fever grips the industry
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The Independent Online

The Turkish government is understood to be gearing up for its third attempt at selling the state-controlled tobacco monopoly Tekel.

The move, should it go ahead, will be of major interest to cigarette companies around the world, including the FTSE 100 giants British American Tobacco (BAT) and Imperial Tobacco. Tekel controls the world's seventh-biggest cigarette market, where more than 100 billion are smoked each year.

It will be the third time that Tekel has come on to the market. Japan Tobacco International won an auction two years ago with a $1.15bn (£620m) approach, but the Turkish government decided to pull the sale. It was then forced to cancel a second auction after failing to attract any bids.

It is understood that many players are reluctant to pay the sort of price that the authorities are seeking.

"They want to sell it but they've made a bit of a pig's ear of it so far," said one industry insider. "There was a big gap between the expectations of the Turkish government and what the sealed bids were. Everyone will be watching this."

Paul Adams, chief executive of BAT, confirmed that the owner of Lucky Strike and Dunhill would be interested in a new auction for Tekel. We bid [last time], we lost that, and then the government decided to pull the sale. The question is what's for sale and what the expectation is on price. We don't think it's worth more than other bidders are prepared to pay, and that's still an outstanding issue."

Imperial Tobacco also lost out in the first auction, but since then it has opted for a greenfield approach towards the Turkish market and spent around £40m opening a factory in the country. However, its chief executive, Gareth Davis, has previously said he wants to complete another significant deal before he leaves the company. Imperial's last major deal was the 2002 acquisition of Germany's Reemtsma for €5.2bn (£3.6bn).

A number of governments have sold off state-controlled tobacco groups in recent years. BAT, for example, spent €2.3bn acquiring Italy's ETI cigar and cigarette business in 2003, beating offers from the Spanish group Altadis and a consortium of Italian businessmen.

There has been a wave of consolidation in recent years in the tobacco sector, which is searching to replace declining volumes in Western markets as the number of smokers continues to fall. The Spanish group Altadis is also thought to be a target and has long been linked with Imperial.

Earlier this month Altadis reported first-quarter results that, as expected, revealed market conditions in Europe were getting tougher. The company also confirmed it was conducting a strategic review to maximise shareholder value, which analysts widely took as signalling a break-up.

Altadis, which said it would look at "all options", will present the conclusions of the review at the interim results at the end of August.

UBS recently increased its price target on the stock, noting that while there had been no change in earnings estimates, it reflected a premium of around 15 per cent for any potential bid. It added that the industrial logic for the acquisition of Altadis by Imperial was "clear".

However, BAT's Mr Adams said he would not be rushed into a deal, despite the wave of industry mergers and acquisitions.

"The very fortunate position that we're in is that we don't need to do a deal to grow," he said. "If we can do one that provides a good return to shareholders, we will look at it. We haven't ruled anything in or out."