Imperial Tobacco today revealed the real reason behind a decision to suspend its £600 million annual share buyback scheme by announcing the $1.9 billion acquisition of US cigarette maker Commonwealth Brands.

The British company is buying America's fourth largest cigarette producer from Houchens Industries, a US conglomerate which is the country's biggest employee-owned business. The deal is expected to complete in April this year.

The acquisition will significantly boost Imperial Tobacco's footprint in the US, where it owns cigarette paper manufacturer Robert Burton Associates.

Imperial Tobacco had intended to grow organically in the region, earmarking $20 million a year to expand its presence by increasing its staff from 40 to 200, but the company has chosen instead to grow through acquisition.

BACKGROUND

• Imperial gets fired up over Altadis bid

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• Imperial Tobacco bids £7.6 billion for Altadis

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An Imperial-Altadis deal is logical. The company wants Altadis’s stable of brands, ranging from Gauloises Blondes to Cohiba and Montecristo

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However, the market reacted negatively to this morning's announcement, sending shares down 1.61 per cent, or 36p, to 21.95p.

Last month, speculation heightened that Imperial Tobacco, which makes John Player Special and Embassy cigarettes, was set to be taken over after the company refused to update the market on the status of its buyback programme, which was suspended in December after rival UK company Gallaher, said it had received a £7.5 billion approach from Japan Tobacco.

Robert Dyrbus, finance director at Imperial Tobacco, said it was likely that buybacks would resume in the second half of next year when the company will review its financial position after increasing its current £3.8 billion debt facility by £1 billion to acquire Commonwealth Brands.

Gareth Davis, chief executive at Imperial Tobacco, said the company is planning to launch a range of new tobacco brands in the US, which could eventually be rolled out across the rest of its global operations, but declined to divulge details of the products because of market sensitivity. He added that he does not expect to make any job cuts at Commonwealth Brands.

Commonwealth Brands holds 3.7 per cent of the American cigarette market, and owns brands including USA Gold and Sonoma. In the year ended September 30, 2006, it reported pre-tax profits of £30 million on £178 million in revenue. In its last financial year it produced 14 billion cigarettes, but has the capacity to manufacture 20 billion per annum.

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