Imperial Tobacco’s approach to Altadis is the latest sign of tobacco industry consolidation. There are now many possible permutations. Imperial may be successful, if it lifts its €45-a-share indicative bid for Altadis. Philip Morris, owned by Altria, may feel bounced into making a bid for Imperial, knowing that a joint Imperial/Altadis would have too large a market share for it to swallow. Altadis, in turn, may launch a ‘Pac-man’ bid of its own for Imperial. Not to forget that British American Tobacco could also bid for Altadis.

Tobacco lex chart

Whatever the outcome – and the likeliest seems to be a successful takeover by Imperial of Altadis – this will probably be the last big deal in the tobacco sector, which has already slimmed down from six to five big listed players. Between them, these control nore than 90 per cent of the European tobacco market and competition concerns make further consolidation unlikely.

The industry will thus have to stop focusing on the struggle for global domination and turn to issues closer to home. Investors are likely to demand greater balance sheet efficiency from those with excess capacity, like BAT and, particularly, Altria, which after the spin-off of Kraft Foods is completed, will have a market capitalisation of about $132bn and no net debt.

The companies, in turn, will have to concentrate once more on improving profitability via pricing and canny branding, rather than by adding volume, though small deals – in the emerging markets especially – remain an option. Organic earnings growth, even in the mature markets, is still achievable. Imperial, for example, has been able to increase profitability in the UK despite declining volumes.

When the dust settles from this latest round of consolidation, the main impact, therefore, is likely to be on valuations. Buoyed by bid hopes, Imperial’s shares are currently more expensive in price/earnings terms than they have ever been and the sector as a whole is trading at a 20 per cent premium to its historic p/e average. As the industry returns to a more normal state, so should the rating of its shares.

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