February 23, 2015 / 12:35 PM / in 4 years

British American Tobacco mulls $3.5 billion buyout of Brazil unit stake

LONDON/SAO PAULO (Reuters) - British American Tobacco Plc (BATS.L) is considering a buyout of the 24.7 percent stake it does not already own in Souza Cruz SA CRUZ3.SA, Brazil’s largest cigarette company, in a deal that could cost about 2.3 billion pounds ($3.53 billion).

The German production site of the British American Tobacco Cigarette Factory (BAT) is pictured in Bayreuth, southern Germany, April 30, 2014. REUTERS/Michaela Rehle

In a statement on Monday, London-based BAT said it was looking to pay 26.75 reais in cash for each share of Souza Cruz. That is 13 percent above Souza Cruz’s closing price on Friday and represents a 30 percent premium to its volume-weighted average closing price over the last three months.

BAT is negotiating a credit line with a major British-based lender to help pay for the deal, a source with direct knowledge of the plans told Reuters on condition of anonymity. The offer is subject to approval by BAT’s board and an independent appraisal report, as required by Brazilian securities law.

The buyout would give the producer of Dunhill cigarettes full control over Souza Cruz, which has about 80 percent of Brazil’s market. BAT last considered a Souza Cruz buyout almost five years ago, but the plan foundered due to a strong Brazilian currency, the source added.

The Brazilian real BRBY has shed 35 percent against the dollar since February 2010.

Shares of Souza Cruz had their biggest intraday gain in almost four years, jumping 9.5 percent on Monday on Sao Paulo’s stock exchange. The stock is up 22 percent in the past 12 months. BAT shares were up almost 2 percent at 37.27 pounds in London.

Souza Cruz has more than 5,000 minority investors in Brazil, including a large chunk of retail investors who have kept the stock in their families for two or three generations, the source added.

The company, which was founded in 1903 by Portuguese immigrant Albino Souza Cruz, has six of Brazil’s top 10 brands, including Derby, Hollywood, Free and Dunhill. The founder transferred control of the Rio de Janeiro-based firm to BAT in 1914.

A BAT purchase of Souza Cruz’s minority stake would come amid a move by a number of foreign companies to delist their Brazilian subsidiaries, a sign of confidence that they can better navigate Brazil’s tough economic waters without pressure from minority investors.

A buyout would also help BAT reduce expenses related to corporate governance, enhance operational synergies and better implement capital spending plans, the source said.

Deutsche Bank AG and UBS AG are advising BAT on the deal, the statement said.

Editing by Louise Heavens and Paul Simao

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