TEXT-Fitch:British American Tobacco's share buybacks rtgs neutral

Feb 23 - Fitch Ratings says that UK-based tobacco company British American Tobacco's (BAT; 'BBB+'/Stable/'F2') announcement that it intends to conduct another share buy back programme of GBP1.25bn in 2012, raising the amount of annual spend from 2011's GBP0.75bn has no impact on BAT's ratings.

Fitch believes that, despite this higher spending, BAT's credit metrics will remain comfortable for the company's 'BBB+' rating. The company has headroom to absorb a mild deterioration of credit metrics should its cash flow not fully absorb the GBP1.25bn disbursement.

As a reference, in its November 2011 rating affirmation commentary, Fitch stated that "although BAT is not exposed directly to strong litigation, only through its associate RAI, an adverse multi-billion-dollar verdict in any tobacco litigation case or an increase of gross dividend, lease and pension-adjusted leverage above 2.5x would be negative for the ratings. Similarly, larger-than-anticipated declines in global tobacco consumption stemming from adverse regulatory initiatives, could lead to a downgrade."

The incremental amount of share buyback disbursements for 2012 is partly covered by cash proceeds that BAT will enjoy during the year by participating to the Reynolds American (RAI, 'BBB-'/Positive) share buyback programme. BAT's 42% owned associate RAI announced in November 2011 an USD2.5bn share buyback programme to be completed between January 2012 and June 2014. Since BAT does not intend to increase its participation in RAI, it will gradually sell RAI shares on the market at the pace of RAI's share buyback, expecting to cash, at current exchange rates, approximately GBP250m during 2012.

Based on preliminary numbers reported today, BAT had net debt of GBP7.9bn at end-2011, and generated during 2011 EBITDA of approximately GBP5.9bn and free cash flow (excluding working capital movements) of GBP1.1bn, yielding a net lease adjusted debt/operating EBITDAR of approximately 1.4x-1.6x, in line with Fitch's forecasts and unchanged from 2010.