Plans to outlaw branded cigarette packaging in Britain are hanging over Imperial Tobacco Group Plc as the company clings on to its investment-grade rating after announcing $7 billion of debt-financed acquisitions.
Forcing companies to sell cigarettes in plain packs could undermine profits by making it hard to raise prices at a time when global tobacco consumption is falling, according to Moody’s Investors Service and Fitch Ratings. Health Minister Jane Ellison said in April that branded cigarettes could be banned as soon as next year.
“Tobacco manufacturers will find it increasingly difficult to maintain brand value over time,” Lola Cavanilles, Moody’s London-based tobacco analyst, said in an interview. “We expect sales volumes to decline.”
Imperial Tobacco, the number-two cigarette-seller in the UK after Japan Tobacco Inc., was put on review for a possible downgrade at Moody’s and Fitch in July, after it agreed to pay $7.1 billion for US cigarette brands and assets cast off to assuage anti-trust concerns over the merger of Reynolds American Inc. and Lorillard Inc.
The Bristol, western England-based maker of Gauloises Blondes and Davidoff cigarettes, which has the lowest investment grade at Moody’s and the second lowest at Fitch, is financing the deal with debt. That’s stretching its balance sheet, and “the threat of plain packaging adds to that,” Cavanilles said.
Graphic Warnings
The UK would be the first major European country forcing all cigarettes to be sold in uniform olive-green packages with graphic health warnings and the brand name confined to the bottom of the pack in small print. The Department of Health concluded its final consultation this month and will respond in “due course”, it said in a statement.
Imperial Tobacco pound bonds have returned 5.1 per cent this year, compared with an average of 7 per cent for the 50 largest similarly rated issuers, according to Bank of America Merrill Lynch index data. Investors demand an extra 155 basis points of yield to hold Imperial bonds maturing in 2022 instead of similar-maturity government debt, up from 139 basis points two months ago.
The company will see its debt rise to about 4.4 times earnings before interest, taxes, depreciation and amortisation in 2016 from about 3.5 per cent this year, according to Philip Gorham, an analyst at Morningstar Inc. in Amsterdam.
Bloomberg News, edited by ESM
