Imperial Tobacco Group Plc’s (LON:IMT) share price reached an all-time high this week, driven by renewed speculation that it could soon face atakeover bid from one of its peers. The surge of nearly four percent on Monday was caused by higher trading volumes, which some traders interpreted as a signal that Japan Tobacco could bid for its UK peer in the near future. Other tobacco firms, including British American Tobacco Plc (LON:BATS) and Altria Group, were also thrown in the mix as possible suitors. Meanwhile, cooler heads pointed out that such a deal was unlikely to happen so soon, given the fact that Imperial Tobacco’s shares had just hit an all-time high.
But if an Imperial Tobacco takeover were to materialise, who would the likely bidders be? According to a recent analysis on the matter by The Motley Fool, it would all depend on the market share.
While British American Tobacco has been mentioned as one of the potential bidders, some analysts, such as Morningstar’s Philip Gorham have pointed out that Imperial may be too big for BAT to acquire it without any help. This has led to speculation that Imperial’s peers will join forces to buy separate parts of the company. Such a move would also help any bidders to ease potential anti-trust concerns, Motley Fool writer Rupert Hargreaves said yesterday. He then looked at what presence Imperial and its peers have in the major tobacco markets.
In Europe, the biggest market share – 38 percent – is held by Philip Morris, the international arm of Altria. BAT comes in second place with a 21-percent share, followed by Japan Tobacco with 18 percent. Imperial’s share is the smallest of the four – 16 percent. In this situation, a bid for the company’s European operations by Japan Tobacco seems most likely, Hargreaves says.
In Russia, Japan Tobacco controls more than a third of the market, with Philip Morris not that far behind. BAT and Imperial have 21 percent and 10 percent of the market, respectively. Here a bid for Imperial’s business by BAT would make sense, as it would take BAT’s share of the market to 31 percent, in line with that of Philip Morris and Japan Tobacco.
Indonesia is an interesting case, because here Imperial is one of the two dominant players, with a 28-percent share of the market. Philip Morris controls 35 percent, while BAT (eight percent share) and Japan Tobacco (no presence) are not major players, which makes them both possible bidders for Imperial’s business.
Finally, in the US the situation is more complex than in the other markets. The market is dominated by three firms - Altria (51 percent), Reynolds American (32 percent) and Imperial (10 percent). However, given the connection between Altria and Philip Morris, as well as the fact that BAT has a majority stake in Reynolds, the number of players involved becomes higher. Japan Tobacco has no exposure in the region.
Analysing the current market share information, Hargreaves concluded that BAT and Japan Tobacco were Imperial’s most likely suitors. However, the analyst cautioned that investors should not rush to buy Imperial’s shares on the speculation that the company may be taken over at some point in the future. He pointed out that Imperial had been the subject of takeover rumours for more than two decades and added that such rumours rarely have any weight behind them.
In today’s trading, Imperial Tobacco shares were down 0.9 percent at 3,566.00p, as of 15:15 GMT. The stock has risen 25.7 percent since the start of the year and the company’s market capitalisation currently stands at £34.2 billion.
The 18 analysts offering 12 month price targets for Imperial Tobacco have a median target of 3,715p, with a high estimate of 4,100p and a low estimate of 2,700p. As of November 14, 2015, the consensus forecast amongst 21 polled investment analysts covering Imperial Tobacco had it that the company will outperform the market. The same consensus estimate has been maintained since August 24, 2015, when the sentiment of investment analysts improved from “hold”.