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ITC seen unaffected by VST bidding outcome

British American Tobacco Plc, the world's second-largest tobacco company, could fail in its attempt to retain clear control of an Indian subsidiary, analysts said on Monday.

Little known Bright Star Investment this past weekend increased its bid for control of VST Industries, India's second-largest cigarette maker.

"It looks as if we have delivered the knock-out blow," John Band, managing director of ASK Raymond James, Bright Star's merchant banker, said.

On Sunday, the deadline for counter offers, Bright Star, an unlisted private firm owned by Bombay-based broker R S Damani, hiked its bid to Rs 151 per share from Rs 118. Bright Star also raised the percentage of shares its prepared to buy to 30 per cent from 20 per cent. Damani already owns a 16 per cent stake.

The revised offer topped the counter bid of 125 rupees per share announced last Thursday by Russell Credit, a 100 per cent subsidiary of Calcutta-based ITC.

ITC is India's largest cigarette maker. BAT owns 32 per cent of both ITC and VST, and has supported the effort of the ITC subsidiary to block Bright Star from gaining control of the smaller of its two Indian subsidiaries.

In reaction to the weekend news of the sweetened offer, VST shares rose nearly 8 per cent on Monday to close at Rs 135.80.

Winners, losers

Analysts said the Indian cigarette market is unlikely to be much affected by the outcome of the bidding war for control of VST no matter how it ends.

VST is largely a regional player with about a 12 per cent share of the national market, a distant second to ITC's 66 per cent.

It sells lower-end, non-filter cigarettes, which became a stagnant category after increases in excise duties over the years made them more expensive.

Furthermore, Bright Star will have to contend with a new regulatory scenario which severely restricts advertising and sales promotions by tobacco companies.

In March, the government said it would ban advertising by cigarette companies and their sponsorship of sports and cultural events.

Analysts said these measures would make it more difficult for smaller, lesser-known companies like VST to market their brands in the face of established leaders like ITC, whose brands have high name recognition.

Bid and counterbid

Bright Star has emerged the likely winner in the bidding war for VST which began in February when Bright Star initially made a hostile offer at Rs 112 a share.

The ITC subsidiary quickly responded with a counter offer of Rs 115.

BAT has backed the ITC bid, since any effort by BAT to directly hike its 32 per cent holding in VST could face hurdles as the government has been discouraging higher foreign investment in tobacco companies.

Russell Credit, the fully owned ITC subsidiary, said the ball was now in VST shareholders' court.

"We are confident that VST shareholders will take an appropriate decision in this matter after careful consideration of what is good for the company (VST)," a spokesman for Russell Credit said.

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