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Derivatives

BAT Spreads Tighten After ETI Acquisition

Credit-default swap spreads tightened on British American Tobacco last week following its purchase of Italy's state-owned tobacco company, Ente Tabacchi Italiani. BAT acquired ETI on July 16 for EUR2.3 billion (USD2.64 billion), EUR800 million more than the market had predicted.

Investors feel more bullish on BAT now, even though it has spent more than expected to acquire ETI, because it is less likely to increase its exposure to the harsh U.S. tobacco market. The company was being linked with a take over of R.J. Reynolds, the second largest company in the U.S. In the U.S., major players have to contribute to healthcare costs, cigarette consumption is declining and the threat of litigation continues.

Stephanie Foster, consumer products credit analyst at Dresdner Kleinwort Wasserstein in London, said, "The market thinks BAT is now less likely to acquire R.J. Reynolds." She added, "Investors are more comfortable with the company now that it looks like exposure to the U.S. market will not be increased and credit spreads have tightened as a result."

Five-year credit-default swap spreads came in from 122-127 basis points to 108-113bps. A similar tightening was seen in other tobacco companies with spreads closing by around 3bps on average.

Both Standard & Poor's and Moody's Investors Service moved BAT's credit rating to negative watch. S&P rates the tobacco giant A minus and Moody's has it at Baa1.

Five-Year Mid-Market Protection On BAT

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