The BAT man
Steve Burton, treasurer in corporate finance at British American Tobacco is described by tobacco analysts as astute, knowledgeable, sharp, but personable. And he has a passion for the capital markets. Since joining BAT in 1995, he has honed his treasury skills by gaining expertise in risk management, corporate finance and the operational side of the business. The latter was acquired after a two-year stint in the Hong Kong office as regional treasurer of the group.
Now his focus is firmly aligned to managing the group’s external and internal debt and pulling the strings in the capital markets. Although Burton maintains that the core currencies for BAT are still sterling and euro, the firm has also issued bonds into the Malaysian, Australian and Mexican markets. “There is an international flavour to the capital markets here,” he says.
The €3.5 billion increase in bond markets issuance last year has been mirrored by a growing focus on bondholder relations. “We are very cognisant about our role in informing our investors, ” says Burton. “Bondholders are an extremely important stakeholder for us and our aim is to treat them on a par with our equity investors.” In the last 12 months, BAT has educated clients about the risks associated with the tobacco business by undertaking roadshows, conference calls and investor meetings. And this year’s plans include providing a more structured programme of investor updates.
The main concern at the start of 2003, notes Burton, was litigation – the bane of the tobacco sector. Confidence in the sector sapped away because of the Price/Miles lights case, which caused a lot of volatility in spreads and resulted in many investors steering clear of tobacco credits.
“Our spreads suffer from a lot of newspaper headline risk and we are taking volatility out of spreads through the education process, so investors can look through to the truth and actually say this is just a headline,” says Burton.
The environment for litigation in the US has dissipated somewhat with the dismissal of the $145 billion Engle class action and State Farm case that limits future punitive damages. And BAT can draw confidence from its stay in the Howard case and the decertification of lights class actions in Minnesota and Massachusetts.
Burton admits that it is very difficult to get to grips with the US litigation system “as the capacity for the legal system to surprise remains”. Nevertheless, he believes that BAT has put the right structure in place to overcome these barriers, an example of which is the corporate ringfence around US subsidiary Brown & Williamson. The proposed merger of B&W and RJ Reynolds to form Reynolds American will also reduce BAT’s exposure to US litigation as the firm will be indemnified by the new entity for all current and future litigation. The transaction is still awaiting approval from US regulators but a decision expected in June this year at the earliest.
BAT’s acquisition strategy was another concern for investors last year, especially after the purchase of ETI, the Italian state-owned tobacco company. Investors questioned the firm on how far it would go within the consolidation of the business. “It seemed that RJ Reynolds was the one that was mentioned every other week and Gallaher every other month,” says Burton. But with the RJ Reynolds rumour becoming fact, does this mean that Gallaher has some substance too? All Burton will say is that “we have no particular plans; things will happen over time”.
BAT has targeted a BBB+/Baa1 rating in the long term, but if the right transaction does arise, says Burton, the firm is prepared to take a one-notch hit. “Our long-term target is where it is at the moment, but with a possible blip in between.”
With tobacco credits returning to a more defensive play with stable spreads, investors are interested in what kind of supply they can expect from the issuer. BAT has €1.5 billion of debt maturing in April and analysts expect a new bond issue in the first quarter. “We will certainly come back to the markets this year, but we are under no pressure to do so,” says Burton. “We are pretty open to which currency we will pick, but euros look favourite.”
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