Imperial set to bid £3.6bn for Reemtsma

As merger to create world's fourth-largest cigarette maker is smoked out, analysts expect a wave of takeovers

Imperial Tobacco is poised to enter the super league of cigarette players with the €6bn (£3.6bn) purchase of Reemtsma, the privately-controlled German tobacco group. The deal, which would see Imperial become the world's fourth-largest cigarette maker, is expected to be clinched later this week, industry sources said.

Analysts expect the move by Imperial to spark a new round of takeovers in the tobacco sector, with the world's top three groups coming under pressure to retain their status. Competition is hottest in the developing world where cigarette consumption is still growing at 1 to 2 per cent a year, compared with a decline of around 0.5 per cent in Western markets.

Imperial is understood to have beaten off competition for Reemtsma from Japan Tobacco, which is part-owned by the Tokyo government, and Altadis, the Franco-Spanish cigarette manufacturer. The fit is good strategically for Imperial, catapulting the British company into Asia and giving it a toehold in Central and Eastern Europe. Reemtsma, which makes the Peter Stuyvesant, Davidoff and West brands, also has a quarter of the German cigarette market, the biggest in Europe.

Imperial was yesterday forced to confirm that it was in talks with Tchibo, the family-controlled German consumer goods group that owns 76 per cent of Reemtsma, following weekend reports that a deal was imminent. It said in a statement: "These discussions are ongoing. A further announcement will be made in due course if required." The news sent its shares up 12.5p to 930p, close to a record high.

Industry sources expect the Tchibo supervisory board to make a final decision today. Any deal would need to be approved by an extraordinary shareholders meeting, which would involve the Herz family, which owns Tchibo, and the Reemtsmas. Imperial is thought likely to fund 30 per cent of the purchase price by a one-for-four rights issue to raise €1.7bn, relying on debt for the rest.

One analyst, who did not wish to be named, described Reemtsma as "one of the last attractive consolidation propositions". The German cigarette maker comes with the added bonus that it does not have any exposure to the litigious US market.

While the industry has been consolidating for the past decade, 1999 prompted a trio of mergers that saw British American Tobacco absorb Rothmans, Japan Tobacco link up with RJR International, and Seita and Tabacelera form Altadis.

Tobacco groups shifted their acquisition strategies up a gear following their inception as independent companies. Imperial has been a focused tobacco group since 1995 when it was spun out of the Hanson conglomerate, while Gallaher used to belong to Fortune Brands. Even British American Tobacco, the world's number two that celebrates its 100th birthday this year, was once part of a group that included Allied Dunbar, the insurer.

Gallaher, the smallest of the three British tobacco groups, has been busy in Europe and Asia, adding Austria Tabak, the former state monopoly that it bought last year for £1.4bn, to Russia's Liggett-Ducat. It also bought up the rights to its Benson & Hedges and Silk Cut brands in most of Europe.

Likewise, Imperial has also been busy. Deals including the purchases of Rizla, Van Nelle Tabak and 75 per cent of Tobaccor, the second-largest tobacco manufacturer in sub-Saharan Africa, have helped Gareth Davies, its chief executive, to develop a reputation as a shrewd negotiator. If Imperial adds Reemtsma to the list it will be forced to watch the next round of consolidation from the sidelines while it beds it down.

With growth opportunities for cigarette makers in the West limited to taking market share from rivals, tobacco companies are looking further afield to sustain long-term growth. The jewel in the crown remains China, where one in three of all cigarettes are sold worldwide. BAT, which last year signed a deal to build a factory in China, is confident of being the first to crack the market, although Philip Morris and Gallaher are hot on its heels.

Elsewhere, globalisation is prompting governments to weigh up the prospects of swapping the easy cash that its state-controlled cigarette makers provide for the long-term benefits on offer if foreign multinationals invest in their economies. Italy, Turkey, Egypt, Taiwan and South Korea are among the prizes up for grabs.

Simon Willis, a sector analyst at ING Barings, adds: "We are seeing local companies in Asia and Eastern Europe more keen in get into bed with multinationals." He attributes this to a sense of resignation that Western companies will find some way of breaking in regardless.

As more governments loosen their grip on state monopolies, the opportunities will increase for multinationals to claw back control of their brands. International tobacco companies entering a new market often had to licence their brands to the state monopoly. This resulted in a highly fragmented global cigarette map, which is divided by regions rather than brands. For example, Gallaher owns Benson & Hedges in Britain and most of Europe, but it belongs to BAT in south and central Asia. Even Marlboro, the star of Philip Morris's stable, is not truly global, as BAT owns it in Canada.

A Reemtsma deal will remove an important piece from the global tobacco chessboard. But it will not be the last.