Richemont to place 5% BAT stake

Marcel Michelson, Iafrica Business News,12 December 2002

Swiss-based luxury goods group Richemont struck a deal on Wednesday to sell a five percent stake in British American Tobacco Plc (BAT) some 18 months earlier than originally planned.

The deal removes a stock overhang on BAT that was keeping down the share price, while Richemont is locking in proceeds from part of its BAT holding.

The transaction will result in a euro 300-million book gain for Richemont, though the short-term cash benefit is limited just to the revenues it receives from the sale of the warrants.

Cie Financiere Richemont SA, which with its portfolio of brands such as Cartier, Van Cleef & Arpels and Montblanc is the world's number-two luxury group behind LVMH of France, said its R&R Holdings unit was selling warrants on some 120.9 million shares in BAT.

R&R — Richemont and Remgro — had a stake of some 33 percent in BAT and this will be reduced to around 28 percent.

Richemont's stake will fall to 18.6 percent from over 21 percent. Remgro, which owns a third of R&R, is controlled by the South African Rupert family that founded and runs Richemont.

"Today's issue of the warrants dilutes the June 2004 stock overhang which would have hit BAT share price if a full five percent of BAT's shares were sold by Richemont," J.P. Morgan analyst Michael Smith said.

Richemont shares were one percent higher at midday while BAT stock dropped by 2.4 percent.

Under the terms of a 1999 merger of Richemont's Rothmans International tobacco interests with those of BAT, Richemont obtained a 23.3 percent stake in the London-based tobacco firm, which is the world's number-two cigarette maker.

Remgro — named after Richemont's predecessor company Rembrandt Group — had some 12 percent.

PUT OPTION

BAT did not want Richemont to keep its controlling stake for long, so Richemont's owners, the Rupert family, agreed to reduce the stake over time and entered into a "put" option to sell its BAT preference shares.

The first half of the preference shares were sold in June 2000 and the second batch was due in June 2004 at 675 pence per share. Now Richemont is selling warrants on these shares and it will either get 675 pence per share from the warrant owners in May 2004, or the same amount from BAT in June 2004.

In 2004, Richemont will as planned get 544 million pounds for the BAT shares and South African investment firm Remgro said its share of the proceeds in 2004 would be £272-million.

R&R will keep 604.3 million BAT ordinary shares.

"When we merged Rothmans International with BAT in 1999, we asked for the compulsory redemption terms for the preference shares as a quid pro quo for the fact that the shares were non-voting," said Johann Rupert, chairman of Richemont and Remgro.

"Absent any major capital increase in BAT, which would have allowed R&R Holdings to convert its holding of preference shares into ordinary shares, Richemont and Remgro were therefore effectively forced to sell the preference shares or have them redeemed in 2004," Rupert added in a statement.

Lehman Brothers advised Richemont on the deal and is book-running the warrant sale.

"Effectively, we are locking in the price and taking away a big share overhang in BAT which would have depressed the share price at the time of the transaction," a Richemont source said.

The share transaction is unrelated to the core activities of Richemont and the firm declined any comment on its business until mid-January, when it will make a trading update after the key Christmas period.