In the case of Imperial Tobacco (OTCQX:ITYBY), it also offers two of my favorite types of opportunities – the opportunity to pick up bargain assets in antitrust divestitures and the opportunity to be the first on the ground in a newly opening market. I like getting one or the other and love getting them both in a single equity.
Imperial will get more brands than they bargained for
On July 15, 2014, Reynolds (NYSE:RAI) and Lorillard (NYSE:LO) announced a long anticipated combination of their two companies. The deal involves substantial antitrust risk and their solution to that risk involves a substantial divestiture to Imperial:
Securing Federal Trade Commission/FTC approval will be a challenge that might involve additional divestitures to Imperial. This can be an extremely advantageous position for the divestiture buyer because the buyer has the power to delay or disrupt the larger transaction. M&A partners will typically be willing to part with divestiture packages at substantial discounts to their fundamental value in order to expedite their deal. In some deals that I have been involved in, divestitures were practically given away in order to quickly appease antitrust authorities. Specifically, it is reasonably likely that the FTC will demand the divestiture of Doral in addition to Winston, Kool, and Salem. If Imperial holds firm in pricing negotiations, they should be able to buy a brand with a 2% market share for next to nothing. That take their market share from its current 4.5% and 9.2% with the currently agreed upon divestiture package to a total of 11.2% of the U.S. market.
If the deal goes through, Imperial will also own over a third of the US e-cigarette market.
Imperial is in Cuba ahead of the lifting of the US embargo
Imperial is also a 50/50 JV partner with Cuba in Habanos S.A., which is the monopoly guarantor of Cuban cigars. Habanos estimates that it will sell between twenty-five and thirty percent of the U.S. premium cigars if President Obama lifts its embargo on Cuba.
