Sources close to the speculated takeover bid for Gallaher Group confirmed it came from Japan Tobacco. Shares of both firms have since surged. In a press release yesterday, Gallaher Group confirmed the speculation of a takeover bid, but didn't say from whom and offered no guarantee a deal will be completed. Its shares listed on the NYSE jumped 18% on more than 10x avg. volume. Japan Tobacco's shares closed 4.75% higher. Investors and analysts alike welcome the deal which could set off further industry consolidation, especially in Europe. The deal is expected to be in cash, and on an earnings multiple basis, at 12.6x valuing Gallaher at about $15b, would be similar to what JT paid for RJR's non-U.S. tobacco business in '99. Analysts expect a deal around £12/share, which is about a 20% premium from yesterday's close. Both firms have strength across various countries in Europe, "with the only major overlap being in the former Soviet Union," according to Reuters. JT is increasingly dependent on overseas sales, which surpassed domestic sales for the first time ever last year. One analyst said given JT's strong balance sheet and low cost of capital, Gallaher might holdout for a higher bid.
• Sources: Press release, Reuters
• Related commentary: Altria: Stuff Your Stocking With This Long Idea, Reynolds American Reports Smokin' Profits; Altria's Earnings Slip
• Potentially impacted stocks and ETFs: Gallaher (GLH), Japan Tobacco (Tokyo: 2914). Competitors: Altria (MO), British American Tobacco (BTI)
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