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Britain's Imperial Tobacco offered €11.5 billion ($22 billion) for Franco-Spanish rival Altadis yesterday after more than two years of speculation that the two could link up.
Shares in Altadis, whose Gauloise cigarettes are as synonymous with France as red wine and baguettes, jumped 20 per cent after news of the unsolicited bid, evidence the market expects Imperial to raise its €45 a share cash offer.
Altadis said the deal to bring together the world's fourth- and fifth-largest cigarette companies would depend on approval from its board, which is due to meet soon.
Imperial, which owns brands such as Lambert & Butler, West and Davidoff, said discussions were at an early stage and there could be no certainty the approach would lead to a formal offer.
Market players have long expected Imperial to bid for Altadis, which makes Fortuna cigarettes and Montecristo cigars and was bruised last year by price wars and new laws in Spain.
Hostile bids are viewed as difficult to execute in the tightly regulated tobacco sector and have not been attempted in recent years.
US fund management firm Franklin Mutual Advisers which, according to Reuters data, holds 8 per cent of Altadis, said it supported Imperial's approach.
"In the absence of alternative transactions, we are supportive of a transaction combining Imperial and Altadis," Franklin chief investment officer Michael Embler said, adding the fund did not want to get drawn into negotiations on price.
Recent tobacco takeovers have been driven by the need to cut costs as companies face declining cigarette markets in western Europe, exacerbated by smoking bans in public places in many European nations.
Altadis shares, which were suspended before the announcement, stormed higher on their open and closed up 16.7 per cent at €45.40.
Imperial's shares jumped 8.6 per cent to £22.22 ($62.75), the FTSE 100's top gainer.
Eric Bloomquist, tobacco industry analyst at JP Morgan, said Imperial was offering 12.5 times the forecast 2007 earnings, the same multiple Japan Tobacco is paying in a £7.5 billion cash deal for Gallaher Group.
"I think it is a fair price to start discussions, but Imperial may well have to pay more."
He said Altadis had a better business and stronger brands than Gallaher.
Imperial said combining with Altadis on a friendly basis made compelling sense and would make a good strategic fit.
Analysts said there would be no major competition problems and a merger could save at least €270 million a year. Imperial already has a good record of making acquisitions work since its listing in 1996, the biggest of which was Germany's Reemtsma in 2002.
Altadis has repeatedly said it sees itself as a buyer of assets, not a target, and has no plans to sell any of its three units - cigarettes, cigars and logistics - after its formation when Spain's Tabacalera and France's Seita merged in 1999.
Last year the company was savaged by low-cost rivals, tough tax changes and a partial smoking ban in its biggest market, Spain.
Though cigarette volumes tumbled 12.3 per cent, management said 2006 was an exception and growth would return.
Imperial said any formal offer would be subject to terms normally found in Spanish public offers, including its acceptance by 80 per cent of Altadis shares.
Imperial Tobacco is being advised by Citigroup with ABN AMRO's Hoare Govett and Morgan Stanley acting as joint broker.
- REUTERS
