Imperial Brands PLC · LSE:IMB
Imperial Brands — Imperial Tobacco Group — Merger or Acquisition (February 2007)
25 slides from Imperial Brands's merger presentation, Feb 8, 2007
Slide 1: Acquisition of Commonwealth Brands USA
Acquisition of Commonwealth Brands USA 8 February 2007 Imperial Tobacco Group PLC
Slide 2: Gareth Davis, Chief Executive
Gareth Davis Chief Executive
Slide 3: Disclaimer
Disclaimer This presentation includes certain forward looking statements that express expectations of future events or results. All statements based on future expectations rather than historical facts are forward looking statements that involve a number of risks and uncertainties and Imperial Tobacc
Slide 4: Transaction Summary
Transaction Summary Acquisition of 100% of Commonwealth Brands Consideration: $1.9bn (£974m*) Net cost of acquisition**: $1.5bn (£769m*) Deal to be debt financed - share buyback temporarily suspended - Imperial credit rating expected to be unchanged Subject to HSR Act antitrust clearance,
Slide 5: Commonwealth Brands overview
Commonwealth Brands overview Formed in 1991 3.7% share of US cigarette market Main brands: USA Gold (#8); Sonoma (#14) Excellent manufacturing facility 720 employees; experienced senior management Signed Master Settlement Agreement in 1998 Never lost or settled a product liability clai
Slide 6: Strategic Rationale
Strategic Rationale 4th largest US cigarette manufacturer Immediate & significant access to the world’s most profitable tobacco market - US will become our 3rd largest profit contributor Good brands; 13.2% of discount sector Sizeable and skilled sales force High quality cigarette factory w
Slide 7: Key Financials
Key Financials Price represents EBITDA multiple of 10.9x* Reduced to 8.6x post tax benefits adjustment EPS** accretive in current year ROI to exceed WACC in first full year Note: *based on results to 30 September 2006 **before brand amortisation and deferred tax on intangibles 7
Slide 8: Background to US Entry
Background to US Entry Currently sell papers and tubes in US Application to join MSA in September 2006 Major improvements in litigation landscape Organic entry previously planned Opportunity to acquire Commonwealth Brands - good timing - powerful combination - avoids organic entry costs 8
Slide 9: US Market Background overview
US Market Background overview 2nd largest cigarette market in the world 7% of world volumes; >20% of world profits Cigarette market of 376bn* Cigarette market shares of major players - PM 51%; Reynolds 30%; Lorillard 9%; CB 4% Fine cut tobacco: c.11bn**; growing sector - also growth in pap
Slide 10: US Market Background: cigarette segmentation
US Market Background cigarette segmentation 400 394 381 376 350 112 97 91 300 billion sticks 11 13 14 250 200 150 271 271 271 100 50 0 2004 2005 2006 Non-Discount Commonwealth Brands Discount sector ex CB Note: Figures exclude Non-Particpating MSA Members; Source – Maxwell Report 10
Slide 11: US Market Background: main cigarette brands 2006
US Market Background main cigarette brands 2006 42 40 % Share 10 8 6 4 2.3% 2 1.3% 0 Sonoma Winston USA Gold Pall Mall Forsythe Kool V.Slims Camel Marlboro Doral Salem Basic Newport Parliament Premium Discount Note: Imperial estimates 11
Slide 12: US Market Background: route to market
US Market Background route to market Manufacturers 1,600 Distributors/ Wholesalers 282,000 Retailers Consumers 376bn cigarettes, 11bn* loose tobacco, 24bn* smokeless Note: *cigarette equivalents per year; Imperial estimates 12
Slide 13: Historic financial performance
Commonwealth Brands historic financial performance Years ended 30 September 348 350 323 311 300 250 $ millions 200 167 164 142 150 100 50 0 2004 2005 2006 Revenue less duty* EBIT** Note: *duty includes MSA and tobacco buyout costs **after depreciation & amortisation of: 2004 - $11m; 2005 - $12m; 200
Slide 14: Q1 2007 trading performance
Commonwealth Brands Q1 2007 trading performance Q1 EBIT up 8% to $41m Price increase effective 15/12/06 - $1.00/carton - MSA increase (Jan’07) $0.65/carton - Net MPI $0.35/carton Developing growth trend in FY07 14
Slide 15: Commonwealth Brands brand portfolio
Commonwealth Brands brand portfolio This space appears blank because we have removed the images that appear in the presentation. This is because we currently do not feature tobacco product brand imagery on our web site. 15
Slide 16: Brand volumes & market shares
Commonwealth Brands brand volumes & market shares 14 13.9bn 12.8bn 12 11.3bn billion cigarettes 10 Commonwealth Brands market shares* 8 Total Discount cigarette cigarette market sector 6 2004 2.9% 9.4% 4 2005 3.5% 12.3% 2 2006 3.7% 13.2% 0 2004 2005 2006 USA Gold Sonoma Other Note: Years ended 30 Se
Slide 17: Commonwealth Brands selling
Commonwealth Brands selling 450 employees in sales and marketing - strong and established trade relationships Extensive sales force coverage - c.146,000 outlets nationwide - c.58% of all outlets - c.85% of total tobacco revenues Ability to leverage our own brands 17
Slide 18: Commonwealth Brands manufacturing
Commonwealth Brands manufacturing Cigarette factory in Reidsville, North Carolina - 1 million square feet - current annual production of 14 billion sticks - annual capacity of 30 billion sticks - 200 employees in manufacturing - embedded low cost, high quality approach Our first tobacco facility
Slide 19: Master Settlement Agreement
Master Settlement Agreement Considerable improvement in litigation landscape MSA membership key to managing litigation risk Commonwealth 1st to voluntarily sign MSA in 1998 Payments by members based on market share Members must comply with MSA restrictions Members protected from State he
Slide 20: Commonwealth Brands litigation profile
Commonwealth Brands litigation profile Ryan v Philip Morris USA Inc et al: individual case due to be heard 20/11/07 Croft v Akron: Commonwealth indemnified J.L.K. v USA et al: prisoner ETS claim Commonwealth Brands has robust defences against all these claims 20
Slide 21: Litigation track record
Commonwealth Brands litigation track record Never lost or settled a product liability claim Not named in any class action or in DoJ case Key brands launched 1993/1994 Compliant with all MSA restrictions Only ever advertised at PoS and in trade journals Low litigation risk for Imperial an
Slide 22: Commonwealth Brands employees
Commonwealth Brands employees Many similarities with those in Imperial - pride in their work and Company - focused on sales excellence & managing costs - smooth and rapid integration Good cultural fit - senior management team to stay on Benefits of larger sales force and infrastructure 22
Slide 23: Enhanced Combination: expanding footprint
Enhanced Combination expanding footprint EBIT - Year ended 30 September 2006 Proforma Imperial Combined Imperial & £1,356m Commonwealth Brands £1,440m 19% 6% 37% 18% 35% 24% 20% 22% 19% Rest of the World UK Rest of Western Europe Germany Commonwealth Brands 23
Slide 24: Summary
Summary A great deal; an excellent business and fit Immediate access to profitable US market Provides an enhanced operating platform Opportunity to develop our product portfolio Imperial benefit from presence in US market Another value creating acquisition 24
Slide 25: Acquisition of Commonwealth Brands USA
Acquisition of Commonwealth Brands USA 8 February 2007 Imperial Tobacco Group PLC
Imperial Tobacco Group — Merger or Acquisition (February 2007) on 6ix