Private Equity Could Choke on Imperial Cigar Sale

[El Presidente]

 

 

 

Private Equity Could Choke on Imperial Cigar Sale

8 May 2019 By Dasha Afanasieva, Karen Kwok

https://www.breakingviews.com/considered-view/private-equity-could-choke-on-imperial-cigar-sale/

Imperial Brands’ cigar sale could be too strong for buyout barons to inhale. The UK tobacco manufacturer could raise over 1 billion pounds by selling the unit to pay down debt. At that price, a private equity fund could make a decent return. But concern over the negative effects of smoking may limit the appeal.

Judged by the numbers alone, Imperial’s cigar unit should be a prize asset for private equity. The division, which includes a stake in Cuba’s Habanos, could notch up luxury-style top-line growth of around 7 percent a year, thanks to strong demand in emerging economies, particularly China, where sales rose 55 percent last year. Jefferies analysts estimate revenue of 345 million pounds last year and EBITDA of around 90 million pounds

Assuming the same revenue growth and margin this year, and a sale multiple of 12 times EBITDA, the unit could fetch 1.2 billion pounds. With borrowing, the new owner might only need to cough up 578 million pounds in equity. If it can keep sales growing at 7 percent a year, hold the margin steady, and sell for the same multiple in five years, then the original investment could more than double 1.2 billion pounds, according to a Breakingviews calculation. That assumes interest costs of 6 percent, capital expenditure of 5 percent of sales, and that all free cash flow is used to repay debt.

That return may not be enough. Buyout groups and the pension funds which back them are under pressure to show they are investing in a sustainable and socially responsible way. Selling cigars, which cause an estimated 9,000 deaths a year in the United States, could be an eyesore. TPG recently turned down an investment in vaping manufacturer Juul. And, even if investing in a cigar maker makes sense today, the list of potential future owners could shrink in the five years or so that private equity groups usually own companies.

Imperial could have other options. The demand for premium cigars in China means it may draw interest in the Middle Kingdom. China National Tobacco, for example, already imports Habanos cigars, and could use the Imperial unit to expand its international distribution network. For private equity, it’s probably better not to cough up.

[Riverstyx]

“Selling cigars, which cause an estimated 9,000 deaths a year in the United States,”

Where does this number come from?

[jschrader510]

Smoking will be a detractor for PEGs but the bigger issue is uncertainty around U.S. treatment of the embargo IMO. All of these funds invest institutional capital and their limited partners (investors) would most likely not allow an investment in tobacco / partially owned by a communist coutnry. The pool of potential investors is therefore limited to funds that either A. can get around those two issues, B. are family office money without the restrictions or C. in a country that cares less about such things (e.g. China).

[Shelby07]

32 minutes ago, Riverstyx said:

“Selling cigars, which cause an estimated 9,000 deaths a year in the United States,”

Where does this number come from?

I was wondering the same thing. Nevertheless, seems like a pretty safe risk/reward, especially if you don’t inhale. 

[El Presidente]

I look forward to the show should China National Tobacco be the end purchaser 

How will CNT handle Cuban inefficiencies?

How will distributors handle  the cultural move from Havana- Madrid to Havana- Beijing?

 

I love this photo of a Chinese Cigar Factory.  

Except for the complete semblance of order and efficiency....it is just like a Cuban one 

 

[Astar20]

China would seem like the most viable buyer! Interesting to see the affects it would have in the market! 

[Hoepssa]

 

If CT buy them, one day we will get those 'Habanos' made in China  ?
Juan Lopez and Sancho Panza will no longer exist, they will producing Cohiba instead.

[slowsmoke]

2 hours ago, Riverstyx said:

“Selling cigars, which cause an estimated 9,000 deaths a year in the United States,”

Where does this number come from?

 

1 hour ago, Shelby07 said:

I was wondering the same thing. Nevertheless, seems like a pretty safe risk/reward, especially if you don’t inhale. 

I wondered the same, as I've never heard that stat before.  I looked it up but didn't want to derail the thread lol.  Since I'm not alone... looks like it comes from here:

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4151956/

It's one of those things where they deduce the results from a combination of various other studies.  I'll leave it to properly trained folks to opine as to whether the results are any good.

[Corylax18]

1 hour ago, slowsmoke said:

 

I wondered the same, as I've never heard that stat before.  I looked it up but didn't want to derail the thread lol.  Since I'm not alone... looks like it comes from here:

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4151956/

It's one of those things where they deduce the results from a combination of various other studies.  I'll leave it to properly trained folks to opine as to whether the results are any good.

Thanks for the link. Seems like quite a few assumptions, multiplied by several more estimates, by people with ulterior motives and its 9 years old. Even with potentially skewed numbers, its still far safer than driving. Using their numbers the 40k + driving deaths a year place a $100 billion burden on our economy. We should probably outlaw that too.   

If China Tobacco is going to buy it, the timing is perfect! That would be seriously depressing though. As @Hoepssa said, say goodbye to about 80% of the current portfolio. 

[PigFish]

... Bay of Pork Dumplings, just does not have a ring to it!

-the Pig