British American Tobacco (BAT) has won the auction to buy Tekel, Turkey’s state-owned cigarette company, for $1.7 billion (£860 million).

If approved by regulators, the deal will lift BAT’s share of Turkey’s cigarette market from 7 per cent to 36 per cent. Tekel brands such as Samsum, Maltepe, Tekel 2000 and Tekel 2001 account for sales of 32 billion cigarettes per year generating revenues of $151 million.

Paul Adams, the BAT chief executive, said: “This investment, coupled with the country’s rapid economic growth, will transform our position in the world’s eighth-largest cigarette market.” The acquisition included Tekel’s six tobacco factories in Istanbul, Adana, Bitlis, Malatya, Samsun-Ballica and Toka. The company employs about 15,000 people.

Altria, the owner of Marlboro, the world’s No 1 manufacturer, remains Turkey’s biggest cigarette company with a 41 per cent market share. About 115 billion cigarettes are smoked annually in Turkey, where 60 per cent of men still light up despite government initiatives to discourage smokers. An estimated 25 million out of Turkey’s 75 million population are smokers.

World No 2 BAT, the owner of brands including Kent, Dunhill, Pall Mall and Lucky Strike, fended off stiff competition from rival bidders, including the Turkish group Dogan Holding, which submitted a joint bid with Citi Venture Capital International (CVCI) and Tutsab, the Turkish wholesaler.

Cinven, the private equity firm, also bid with a Turkish consortium, as did PI Turkey, a fund controlled by Morgan Stanley, in a joint effort with the Turkish builder Limak Insaat. Sealed envelope bids were submitted on Monday and the deal is expected to complete this year. However, BAT will be keen to obtain final regulatory clearance as soon as possible from the Turkish Privatisation High Council and the Turkish Competition Commission.

Ankara has been trying to sell the tobacco group for several years but has failed twice previously. In 2003 Japan Tobacco International offered $1.15 billion, but the Government subsequently scrapped the sale, saying that the terms were unsatisfactory. No bids were received in the next attempt in 2004 because of restrictions which included keeping factories open and using set proportions of Turkish-grown tobacco. Tekel’s market position has deteriorated since it was first put up for sale in 2001. Its share of the domestic cigarette market was about 60 per cent but has since halved. BAT claims that it will achieve annual savings of about $30 million by the third year of ownership, driven by supply-chain improvements and cost savings. Unions staunchly opposed the sale. In protest, some workers said yesterday that they would occupy the company’s buildings while others laid a wreath at the hotel where the auction had been held.

The sale was also announced only weeks after the Turkish Government approved a law banning smoking in public places from the spring. Higher taxes are also being introduced on cigarettes in the country this year to tackle one of the world’s highest rates of smoking. Deutsche Bank advised BAT on the transaction and Citigroup advised the Turkish Government.

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