British American Tobacco cuts stake in India’s ITC following $17bn loss

The London-listed manufacturer of Lucky Strike cigarettes and Dunhill cigarette is looking to reduce its £15 billion shareholding in an Indian conglomerate. This has triggered a sharp rise in the price of its shares as investors welcomed a potential buyback.

British American Tobacco wants to reduce the 29 percent plus of its holdings in ITC (the consumer goods, hotel and paper group).

BAT shares, which are a favorite of income investors and have risen 7.4 percent, or 172p to £24.91, on the London Stock Exchange as a result. This was also helped by a higher dividend.

Tadeu Marrico, the former finance chief of BAT and now the CEO, stated that they hope to start the sale “as quickly as possible” but warned the process is complex and timing uncertain due to the need for clearance from India’s Central Bank.

BAT wants to maintain a certain level of strategic control on ITC, by ensuring that it does not sell below the regulatory threshold of 25 percent.

The holdings in ITC date back to early 1900s, and have been reduced over the years. Marroco said, “We are actively working to complete the regulatory process that will give us the flexibility we need to monetise a portion of our shares.”

BAT wants its leverage to be reduced to 2.5 times earnings by the end of this year. Then, “we will evaluate all opportunities to return surplus cash to our investors”.

BAT produces Dunhill cigarettes, but the tobacco industry has been contracting on large markets to non-combustible alternatives

Imperial Brands (BAT’s FTSE 100 Bristol rival) announced a £1.1billion share buyback program in November. This follows an earlier £1billion programme that was welcomed by investors. Altria, which owns Marlboro cigarettes and is based in the United States announced a $1 Billion programme last week.

Spring Mountain Investments is the vehicle of Kenneth Dart a billionaire American heir of a foam cups fortune. It owns around 10% of BAT. Spring Mountain Investments is the largest shareholder of Imperial Brands with 6.1 percent.

The tobacco industry is still highly cash-generative, but it is shrinking in mature markets such as the US. This encourages companies to invest into new non-combustible product launches, like heat not burn devices and e-cigarettes, while also navigating stricter regulations and returning cash from the legacy business to investors.

BAT, in December, wrote down its US cigarette business by £25 billion, mostly relating to the Newport, Camel and Natural American Spirit brand names.

The company is facing a shrinking marketplace, accelerated by consumers switching to cheaper brands, and using disposable black market vapes. It also faces uncertainty regarding a possible menthol ban within the US. BAT shares fell to their lowest level in 13 years in December after the historic event.

BAT reported that the non-cash charge for impairment was slightly higher, at £27.3 billion. This is due to a review done ahead of full-year results as well as foreign exchange fluctuations. BAT now has a loss of £17.06bn, down from a profit last year of £9.32bn. The adjusted operating profit increased by 3.9 percent to £12.47 Billion.

The Group’s revenue dropped by 1.3 percent to £27.28bn on a reported base, due to the sale of lucrative businesses in Russia following the Ukraine War, as well as lower cigarette sales, especially in the US.

The increase in revenues was offset by the increased sales of its new products, including its Vuse vaping product and Glo heating products, which rose 15.6% to £3.35 billion.

Jefferies analysts said that investor sentiment towards BAT, as it approached the full-year earnings, was “worse” than they had ever seen in their 14 years of covering the company.

Analysts at RBC Investment Bank, however, said that the ITC plans are “a positive”, as they accelerate BAT’s debt reduction and bring the important share buyback deadline closer to investors.