El Presidente Posted May 13, 2019 Share Posted May 13, 2019 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. Link to comment Share on other sites More sharing options...
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!Register a new account
Already have an account? Sign in here.Sign In Now