BAT’s Stake Offload: ITC Shares Surge as $2.5 Billion Raise Looms

  • BAT’s taps Citi and Bank of America to trim 4% stake in ITC, targeting $2.5 billion raise.
  • ITC shares rise as BAT’s explores stake reduction; potential sale valued at Rs 20,320 crore.
  • Regulatory hurdles limit BAT’s options for divesting ITC shares, despite strategic intentions.
  • Jefferies downgrades ITC stock to “hold” amidst uncertainties over stake sale and market performance.
  • BAT faces challenges with declining cigarette volumes and significant net debt, impacting market dynamics.

ITC Shares Gain Momentum Following BAT’s Stake Offload :

Shares of ITC rose as British American Tobacco (BAT) approached Citi and Bank of America to sell a 4% share for $2.5 billion.

The recent move by BAT to reduce its investment in ITC has sparked a positive market response, with ITC shares rising early on February 13. BAT has engaged the help of Wall Street behemoths including Bank of America and Citi to assist the sale of its stake in the group.

Market response and current valuation :

As of 9:18 a.m., ITC shares were trading at Rs 408.5 on the NSE, up 0.41% from the previous closing session. BAT presently owns a huge 29.03% interest in ITC, worth Rs 1.5 lakh crore. The planned reduction of four percentage points to reach a 25.03% stake might result in the sale of shares worth over Rs 20,320 crore, or $2.5 billion at ITC’s current market value.

Regulatory Challenges and Strategic Intentions :

While a prospective share sale has enormous financial repercussions, regulatory limits provide obstacles. The Reserve Bank of India’s (RBI) restriction on foreign direct investment (FDI) in tobacco industries limits BAT’s possible buyers. Nonetheless, BAT remains dedicated to the selling process, emphasising the need of balance-sheet flexibility and capital reallocation in its Q4 results report, which was published on February 8.

Market Analysis and Investor Outlook :

On February 8, Jefferies, an international brokerage firm, downgraded ITC stock to “hold” from “buy” due to concerns about the stake sale and predicted market performance. The firm reduced the ITC target price to Rs 430 per share from Rs 520, anticipating a period of consolidation after regulatory and taxation problems.

Challenges for BAT and Market Dynamics :

BAT faces several issues, including dropping cigarette volumes in major areas, particularly the United States, where it recently announced a $32 billion write-down. BAT is facing tremendous financial constraints, with net debt of $40 billion, which is roughly three times its earnings before interest, taxes, depreciation, and amortisation (EBITDA) and nearly 60% of its market capitalization.

Conclusion :

The prospective stake sale by BAT in ITC represents a strategic move aimed at optimising capital resources and increasing operational flexibility. However, regulatory obstacles and industry dynamics present constraints that influence investor sentiment and market outlook. As the divestment process progresses, stakeholders constantly follow events to assess the impact on ITC’s market performance and strategic direction in the rapidly changing business world.

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