Pressure Mounts on BAT to Move Primary Listing to US

Mar.22.2023
Pressure Mounts on BAT to Move Primary Listing to US
British American Tobacco may quit London stock market for US due to growing US focus.

According to reports, British American Tobacco (BAT) is facing pressure from at least one major shareholder to abandon its listing on the UK stock exchange and make the US its primary listing location. Losing BAT would be a significant blow to the capital markets, causing the FTSE 100 Index to lose a key player worth $80 billion.


The reasons for agreeing are simple. London-based British American Tobacco is increasingly centering itself around the United States. From 2017 to present, revenue from its largest single market has risen from 21.3% to 45.7%. The company's European and North African markets, including the UK, make up 22.9%, down from 31.2% five years ago. At this stage, a more appropriate name might be American British Tobacco. Due to being overlooked by domestic investors, British American Tobacco's trading volume has declined, creating a discrepancy in valuation compared to PMI, which is listed on the New York Stock Exchange.


Last year, British American Tobacco (BAT), the company behind the Pall Mall and Lucky Strike brands, generated higher revenue and operating profits than Philip Morris International (PMI), but its stock value lags far behind PMI. As of last Friday's close, PMI had a market capitalization of $149 billion, up over 80% from the previous year. Moving its main listing to New York will bring BAT closer to its largest shareholder, make it easier to access larger liquidity pools, and potentially help narrow the valuation gap. According to Rajiv Jain, the Chairman of BAT shareholder GQG, staying on the UK stock market no longer makes sense for tobacco manufacturers.


It is worth doubting whether the valuation gap is truly related to the listing location of BAT. PMI is listed in the United States, but its operations are overseas. The company was separated from its former parent company Altria Group Inc. in 2008, with Altria retaining its US operations. BAT's price-to-earnings ratio remains consistent with that of Altria. This makes sense because both companies are US-based enterprises.


In fact, the relationship between fundamental factors of a business and valuation differences may be more significant than geographical location. Altria suffered losses due to its $12.8 billion investment in Juul, an e-cigarette manufacturer accused of targeting underage users, five years ago. This year, Altria divested its stake in Juul and obtained Juul's heated non-burning patent technology in return.


Meanwhile, Philip Morris International (PMI) has been developing reduced-harm alternatives to traditional cigarettes at a faster pace, which is what large tobacco companies are relying on for their future success. The company is a leader in the tobacco industry and has achieved significant success in Japan through its IQOS heat-not-burn product. Last year, PMI acquired Swedish Match, a manufacturer of nicotine pouches, for approximately $16 billion, adding another non-combustible tobacco business to its portfolio. Furthermore, through distribution in the US, PMI has been able to re-establish itself in the largest tobacco alternatives market, 14 years after it was split from Altria. It also reached an agreement with Altria Group to sell IQOS in the US last year.


Last year, smoke-free revenue accounted for one-third of PMI's total revenue, with the company aiming to increase this to over 50% by 2025. Meanwhile, BAT's smoke-free revenue proportion for 2022 is just 15%, although the company has been catching up by launching products such as Vuse e-cigarettes, glo "heat-not-burn" products, and Velo nicotine pouches. However, BAT also faces other challenges, such as the proposed ban on menthol cigarettes by the US Food and Drug Administration (FDA). Bloomberg analyst Duncan Fox estimates that these products account for about 35% of BAT's revenue in the US and 16%-17% of total sales. As PMI does not sell cigarettes in the US, it is not at risk from this potential regulation, but it is putting pressure on BAT's stock price.


Delaying the initial public offering (IPO) of BAT comes with costs and risks. It would mean that BAT would lose its position as a constituent of the FTSE 100 index, and there is no guarantee that it will be included in equivalent benchmark indices in the US. If BAT withdraws from London, some UK funds that hold domestic business authorizations may have to divest. The impact on relative investment flows and tax treatment must be considered. Listing in the US requires the approval of 75% of BAT shareholders, making it unlikely without strong support from GQG. American investors can already purchase BAT shares through American depositary receipts (the company is also undergoing a secondary listing in Johannesburg).


Preparing for a world without smoking takes time and investment, and regulatory challenges are never far away. For investors, seeking a quick fix to boost BAT stocks may be tempting, and New York may not provide it.


Reference:


Leaving London may not significantly improve the financial performance of BAT's stock.



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