British American Tobacco has agreed to pay USD 1.72 billion to buy Tekel, Turkey's state-owned cigarette maker, in a move which will pit it against Philip Morris International in the world's eighth-largest tobacco market.

Following an auction on Turkish television, the maker of Lucky Strike was declared the winner, beating bids from Citigroup Venture Capital International, the private-equity firm Cinven, and Turkey's Dogan Sirketler Grubu Holding. Sealed bids were handed in and opened on national television with the lowest bidder – initially Dogan Holding – asked to leave the room, though all representatives decided to stay and watch the outcome. The auction was the third attempt to sell Tekel under a USD 10 billion International Monetary Fund loan accord which aims to cut the state's role in the economy.
It is estimated that 60 per cent of Turkish men smoke, making it an attractive market for BAT, which does most of its business in emerging markets.
Paul Adams, BAT's chief executive, said: "This investment, coupled with the country's rapid economic growth, will transform our position in the world's eighth-largest tobacco market."
The price is considered high with regard to market expectations, as Tekel had been valued at between USD 1.5 billion and USD 1.8 billion. Analysts put this down to the fact that four bidders participated in the competitive auction.
BAT will have 36 per cent of the Turkish market as it will add Tekel 2000 and 2001 to its existing brands, Kent and Vogue in the premium range, and the lower-priced Pall Mall and Viceroy. This compares with the 41 per cent share held by US giant Philip Morris.
Although the country's smoking rates are falling, the population is growing at nearly two per cent a year, and the economy is growing at four to five per cent a year. A law banning smoking in public places, passed in January, will take effect in April, with bars, cafés and restaurants having 18 months to implement the changes.
BAT's investment director, Richard Hodgson, said the ban was taken into account by his company's offer, and that the estimated fall in consumption would be less than ten per cent.
Despite considerable consolidation within the industry over the last few years, Tekel is BAT's first major acquisition since it bought Italy's former state tobacco company in 2003. The deal is expected to be completed later this year, subject to competition regulators and Turkey's privatisation council. Unions in Turkey were unhappy about the deal, and are concerned about the future of factories in Tokat and Bitlis. (pi)