British American Tobacco snaps up Colombian group for $452m

British American Tobacco has cashed in on Philip Morris’s antitrust problems with the purchase of Colombia’s second-biggest cigarette maker, a deal agreed by BAT’s US rival in 2.009 but scuppered by competition authorities last year.

Productora Tabacalera de Colombia makes Mustang cigarettes, the second most popular brand in the country, with an 18 per cent market share.

The $452m (£277m) deal will make BAT the second-largest tobacco group in Colombia after Philip Morris.

The privately owned company sold 5.5bn cigarettes last year, and its addition will boost BAT’s volumes in the Americas by 3.7 per cent to almost 200bn.

It should add 2 per cent to sales in the region.

BAT is paying the same price agreed by Philip Morris in July 2009, which represents a multiple of 11.3 times the Colombian company’s earnings before interest, tax, depreciation and amortisation of $40m last year.

It will be funded by balance sheet cash.

Philip Morris dropped its bid this January, saying regulatory approval had proved “too burdensome”.

The company is already number one in the country and would have had to dispose of some brands to win approval for the Productora Tabacalera deal.

Jonathan Fell, analyst at Deutsche Bank, said BAT was the obvious buyer following the collapse of the Philip Morris deal, since Japan Tobacco and Imperial Tobacco the number three and four global groups in the sector  have only a minimal presence in South America.

“It’s not like you could even use Colombia as a bridgehead, because the other countries are all sewn up,” he said.

Nicandro Durante, BAT’s new chief executive, has said his focus in the first few years at the helm will be on organic growth, but he did not rule out bolt on acquisitions to extend the company’s exposure to the developing world where cigarette volumes are growing.

Analysts said that after paying down debt following the last round of industry consolidation which ended with the purchase by Imperial in 2008 of Altadis, the world’s fifth-biggest tobacco group the global leaders have cash to spend.

Fulvio Cazzol, an analyst with Goldman Sachs, said the forward net debt to ebitda ratio for the sector had fallen from 3.2 times in 2007-08 to 1.5 times now.

However, this deal falls far short of the “significant consolidation opportunities” highlighted by Goldman analysts, including a possible acquisition of Imperial Tobacco by BAT.