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Debt-ridden cigarette seller British American Tobacco (BAT) on Tuesday announced that it will sell a 3.5% stake in Kolkata-based FMCG firm ITC Ltd through a block deal on Wednesday. BAT is offering ITC shares at Rs 384-400.25 each in the block deal which could be worth about $2.1 billion.

After the transaction is completed tomorrow, BAT’s shareholding in ITC will fall to 25.5% from about 29% currently. BofA Securities and Citigroup are joint bookrunners to the deal.

BAT’s wholly-owned subsidiary Tobacco Manufacturers (India) Limited intends to sell 43.68 crore shares of ITC to institutional investors by way of an accelerated bookbuild process, subject to customary closing conditions.
BAT said it will use the net proceeds of the sale to buyback BAT shares over a period ending December 2025, starting with £700 million in 2024.

“I am confident that ITC, under the stewardship of its current management, will continue to create further value for its shareholders. We look forward to remaining important shareholders in ITC as it continues its journey of growth. With this transaction BAT can accelerate the start of a sustainable buyback while enabling us to continue to deleverage towards a new target range of 2-2.5x adjusted net debt / adjusted EBITDA,” said BAT CEO Tadeu Marroco.

Also read | ITC shares fall below Rs 400-level as BAT gets ready to offload stake

Describing ITC as a valued associate of BAT in an attractive market with long-term growth potential, the London-based company said BAT’s initial investment in ITC dates back to the early 1900s and the two companies have a longstanding, mutually beneficial relationship.

As one of India’s leading FMCG enterprises, ITC has delivered significant value for its shareholders and BAT continues to be fully supportive of ITC’s management team, performance and strategy, it said.

Ahead of the announcement, ITC shares ended 1.26% lower at Rs 404.25 on BSE as the stake sale could create a supply overhang in the market.

BAT has made it clear it wants to retain strategic influence, including veto rights, in ITC.

“We regularly review our stake in ITC. We recognise that we have significant shareholding which offers us the opportunity to release and reallocate some capital. Our shareholding in ITC has existed in one way or another since the early 1900s and is subject to numerous share capital changes and regulatory restrictions. We have been actively working for some time on completing the regulatory process required to give us the flexibility to monetise some of our shareholdings and will update you at the earliest opportunity,” BAT had told analysts last month.

Last month, Jefferies downgraded ITC to hold rating and also reduced its target price on the Nifty stock to Rs 430 from Rs 520.

“ITC has had a strong run in the last 2-3 years with a strong recovery in cigarette volumes post Covid-19, which also led to a re-rating of the stock. With overhang from BAT stake sale, two taxation events over the next 12 months, and slowdown in volume growth, we expect the stock to remain range-bound going forward,” it had said.

Market analyst Deven Choksey said BAT’s stake sale could be good for the company.

“Being a professionally run and managed company, I believe that this company would possibly see higher amount of valuation unlocking which up till now the shareholders have not seen. Overall, the fundamentals of the business remains extremely strong and convincing. It is unlocking which is going to drive this particular stock into the new orbit year after,” Choksey said.

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