Imperial Brands falls as bid speculation eases

Imperial Brands was a faller on Friday after Citigroup bet against the longstanding speculation of a bid from Japan Tobacco ever becoming reality.

Citi saw a deal as “extremely unlikely”, because the Japanese state is legally required to maintain a one-third stake in Japan Tobacco.

Funding an offer while preserving its investment-grade credit rating would require Japan Tobacco to use new equity, but the state ownership rule “makes this close to impossible”, the broker argued.

Imperial is not a compelling enough target for the government to back a rights issue, particularly as its products offer little in the way of long-term growth and antitrust regulations would require an awkward carve-up of brands in Europe, it said.

“Buybacks would avoid all the trouble involved in acquiring Imperial,” argued Citi. “But Japan Tobacco has always been reluctant to buy back shares (except when the government was selling), which shows it has little interest in artificially boosting EPS, which we believe would be almost the only benefit of buying Imperial.”

Imperial closed 1 per cent lower at £37.82 in a mixed wider market. The FTSE 100 ended 0.5 per cent lower at 7,203.94, down 33.23 points.

Barclays accounted for 8 points of the FTSE’s decline, losing 5.2 per cent to 212.3p, after it posted an unexpected drop in quarterly trading revenue.

Micro Focus took on 1.5 per cent to £25.88 after Deutsche Bank started coverage with a £29 target. Investors have been too cautious about pricing in synergies from Micro Focus’s £7bn reverse takeover of HP Software, it said.

Drax, the power station owner, rose 6.3 per cent to 323p on an upgrade to “overweight” from Barclays.

The shares have sold off since mid February, when Drax said it would consult shareholders before increasing its dividend.

Barclays, which forecast Drax to have generated £1.1bn of surplus cash by the time biomass subsidies expire in 2027, called the decision “a genuine attempt to balance priorities of growth capital expenditure and increased returns to shareholders”.

Renishaw jumped 5.6 per cent to £34.15 on speculation that Apple has been using its sensors for the next iPhone. Such a deal has the potential to boost Renishaw’s earnings by between 10 and 30 per cent, estimated Redburn.

Royal Mail eased 3.9 per cent to 402.5p after unions rejected its latest pensions settlement offer.

Jefferies advised selling Royal Mail ahead of full-year results next month. It forecast a 7 per cent decline in operating profit because of lower volumes, and cautioned that the pensions settlement proposal put forward by the Communication Workers Union, if applied in full, could send the stock tumbling towards a 200p valuation.