“Imperial does have an incentive to refinance its short-dated bank borrowings quickly, as we believe it is paying a premium of between 30bp and 60bp over the bond,” says Bob Dockray, consumer industrials analyst at Dresdner Kleinwort Wasserstein.
The European market currently appears comfortable with litigation risk, he adds, and since the turn of the year spreads have tightened. Says Dockray: “We believe that any new issue(s) may offer a premium to existing issues and could have a negative impact on outstanding bonds. As a result, the best entry point may be to buy any possible new issue.”
Simon Surtees, credit analyst at Bear Stearns, says: “A new euro benchmark issue from Imperial Tobacco would prove attractive to investors now that M&A uncertainty has been resolved and the funding/debt position has been clarified.”
The response from the rating agencies to the Reemtsma purchase (Imperial Tobacco has the option to buy the remaining 10% of the company later) has been mixed. Moody’s downgraded Imperial Tobacco to Baa3 from Baa2 with a stable outlook. Fitch put the BBB+ rating on negative watch but stated that any downgrade would be just one notch. Standard & Poor’s was least aggressive, affirming the group’s existing BBB ratings. Despite the downgrade, Moody’s predicted Imperial would be restored to its previous financial health in around two-and-a-half years.
DrKW’s Dockray says the acquisition is not without its risks. “It was a business-changing acquisition for Imperial. Reemstma is a geographically diverse business that will generate synergies but also add some integration risk. S&P’s attitude appears to be that Imperial will be able to generate strong cashflow and reduce debt. The agency expects that this will lead to a financial profile consistent with a triple-B rating category by the end of financial year 2004.”
The acquisition will significantly improve Imperial’s business profile – it is now the world’s fourth largest cigarette manufacturer – with an increase in its geographic exposure to higher-growth emerging markets in Europe and Asia. The acquisition will improve its brand portfolio with the inclusion of international brands such as West, R1, Davidoff and Boss. The company says it expects to produce savings of £170 million in fiscal year 2004.