Japan Tobacco (JAPTOB; A2/A+) $3.4b acquisition of VGR Follow up

Reminder Japanese Government through the Ministry of Finance holds 1/3 of JAPTOB. No uplift given Japan's LT rating is flat to it at (A1/A+). Interdependence seen as low as well given 3/4 of JAPTOB revenue outside Japan.

We have generally preferred PM on slightly better fundamentals. JAPTOB is very low levered (net <1x) but PM should close that gap with planned deleveraging.
For 26 & 28 perp-holders (Baa1/A-) trading at Z+160-180, we don't have a firm view on this acquisition. The move in leverage is not sizeable at all (~0.5x turns), increase in non-combustibles exposure is slight negative but diversifying into the US is positive. Margins are in-line with the JAPTOB's group (EBIT 23-24%) but are lower than the Tobacco segment (30%).

The EV/EBITDA multiple it's paid is 9x vs. JAPTOB trading at 9.1x. It's not far off fellow US competitors Altria (9.7x) and BAT (7.9x) and in-line with that not much of a premium to VGR's close (+7%). Equities have rallied into it, we don't see any public leaking of the news but timing of earnings doesn't fully explain the rally.

Reminder only PM and JAPTOB still retail in Russia. It's considered the 4th largest market (behind China, Indonesia and US) and contributes 20% to JAPTOB's bottom line.