BAT In Biggest Gain Since 2020 On Plan To Sell Stake In ITC

(Bloomberg) -- British American Tobacco Plc’s shares rose the most in nearly four years after it said it was trying to overcome regulatory hurdles to sell at least part of its stake in Indian company ITC, valued at more than £14 billion ($17.7 billion).

BAT has “been actively working for some time on completing the regulatory process required to give us the flexibility to monetise some of our shareholding,” it said in full-year results, released Thursday.

ITC is India’s biggest cigarette maker but the company has diversified into other businesses including luxury hotels. BAT owns a 29% stake.

Chief Executive Officer Tadeu Marroco told analysts the potential stake sale in ITC comes as BAT looks for better balance sheet flexibility. It has owned a stake in ITC for over 100 years and the shareholding has been subjected to numerous regulatory restrictions, he added.

Owen Bennett, an analyst at Jefferies, said it was the “strongest signal yet” around the potential stake sale. “This would be a big positive,” said RBC Capital Markets analyst James Edwardes Jones, “accelerating BAT’s deleveraging and bringing the all-important share buyback timeline closer for investors.”

Shares rose 7% in morning trading, BAT’s biggest intraday gain since March 2020 and the sharpest rise on the FTSE 100. The company’s stock has fallen nearly 20% over the past year.

ITC’s shares fell as much as 5.4%.

Writedown

BAT also used the results to increase a writedown on the value of its US cigarette brands, due to the number of Americans quitting smoking. BAT now estimates the non-cash impairment charge related to the US brands, acquired in 2017, at more than £27 billion ($34.1 billion), from an original estimate of £25 billion disclosed in December. That pushed the company to an annual operating loss of £15.8 billion last year, it said Thursday.

Cigarette volumes fell about 8% overall during the year with US volumes falling more than 11%. The company said US cigarette sales were hit by “continued macro-economic pressures,” and the sale of illicit single-use vapes impacting industry volumes.

The maker of Lucky Strike cigarettes, Vuse vapes and Velo nicotine pouches said the smoke-free business achieved profitability two years ahead of schedule and accounted for 16.5% of revenue in its 2023 financial results.

While continuing to sell billions of cigarettes each year, large tobacco companies are shifting to alternative products such as vapes, heated tobacco and nicotine pouches that they say are less harmful.

More people are quitting smoking as governments including in the UK and US increasingly crack down on tobacco use and raise taxes. At the same time, politicians and health regulators are also moving to ban disposable or flavored vapes over concerns about use among young people despite their value as smoking cessation aids.

BAT is the biggest player among Big Tobacco firms in vape products in some major markets. Its Vuse vapes account for about 50% of its UK revenue with disposable vapes accounting for about half of its vape sales in that market, Marroco said on a call with reporters.

Sales volumes of BAT’s vape products rose about 7% overall in 2023 from the year before, while nicotine pouch sales jumped by more than a third. 

Read More: UK to Ban Disposable E-Cigarettes to Reduce Teen Vaping

BAT reported adjusted operating income of £12.5 billion and revenue of £27.3 billion. Analysts expected adjusted operating income of £12.6 billion and £27.7 billion in sales, according to consensus estimates compiled by Bloomberg. 

Marroco took over the CEO role in May last year.

--With assistance from Joel Leon.

(Updates with extra comment from the CEO, and context on share price rise.)

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