Share Buybacks: BAT 

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June 2024

BAT enters into an agreement with UBS AG to purchase shares during the Closed Period, commencing on June 24, 2024 and ending on July 24, 2024. BAT will release the H1 2024 results on July 25, 2024 (i.e. the end of the Closed Period).

Any purchases will be undertaken within certain pre-set parameters. The maximum price which may be paid for a share is an amount (exclusive of expenses) equal to the higher of:

– 105% of the average market value for the five business days immediately preceding the day of purchase

– the higher of the price of the last independent trade and the highest current independent purchase bid.

Following the partial ITC stake sale, on 18 March 2024, BAT announced a £1.6Bn share buyback program: £700Mn in 2024 and with the remaining £900Mn in 2025. The “Initial Stage” of the Program was carried out by UBS AG and the “Second Stage” by Merrill Lynch. Around a quarter of the £700Mn budget was spent in each of these stages – leaving ~£350Mn share re-purchase budget for the rest of 2024. 

June 2024

After spending £150Mn in the first 10 days of the “Second Stage” (~620k shares purchased per day on average), Merrill Lynch pressed the breaks at around the key $31.6 (£25) resistance – reducing the number of shares repurchased from (a high of) 650k to 40k per day.

The 2024 share repurchase budget is £700Mn and UBS spent £175Mn in the Initial Stage. At a £16Mn/day (650k shares) purchase rate, £700Mn program for 2024 would have been completed by Merrill Lynch by the mid of the year.

Moreover, at the Pre-close Trading Update (June 4), BAT did not signal a potential extension in 2024 program budget . BAT stated that

– shares will be re-purchased everyday, except for a few exceptions

– 2024 Program will last until Dec 31 and the £700Mn budget will be used accordingly

– daily trading (re-puchase) volume may differ substantially and the current/past purchasing rates should not be extrapolated.

May 2024

On the first three days of the “Second Stage”, Merrill Lynch purchased 407.8k, 528.3k and 659.0k shares at an average price of £23.50, £23.63 and £23.70, respectively (total amount: £9.6Mn, £12.5Mn and £15.6Mn). During the “Initial Stage”, UBS purchased 280k-300k shares per day initially and 210k shares per day lately (only 175k shares on the very last day). There is a visible acceleration in share repurchases in the Second Stage with Merrill Lynch – which amplifies the expectations for an extension of the 2024 repurchase program (from the initially announced amount: £700Mn). BAT may announce the extension at the next earnings release (pre-close in June or H1 in July), anticipating the proceeds from the ITC Hotels stake sale.

Separately, in line with the policy to maintain the number of treasury shares below 10% of total issued share capital, BAT cancelled 87Mn treasury shares on May 1, 2024. Following the cancellation, BAT holds 133,278,266 treasury shares, representing ~6% of the issued share capital (ex-treasury shares).

Date of Cancellation1 May 2024
Number of treasury shares cancelled87,000,000
Total number of ordinary shares issued following the cancellation2,362,689,451
Total number of treasury shares following the cancellation133,278,266
Total number of ordinary shares less treasury shares2,229,411,185

May 2024

Update on the £1.6Bn share buyback program announced on 18 March 2024:

– £700Mn in 2024 and with the remaining £900Mn in 2025

– 7,435,278 shares (0.3% of the shares outstanding) purchased in the Initial Stage of the Program between 18 March 2024 and 30 April 2024 (program executed by UBS)

– Agreement with Merrill Lynch to purchase shares between 1 May 2024 and ending on 21 June 2024 (“Second Stage”).

We estimate that BAT spent around £175Mn (a quarter of the amount allocated for 2024) in the Initial Stage of the Program. Since the onset of the Program, BAT shares increased 0.4% on LSE (£) and declined 2.9% on NYSE (US$). Based on the prevailing purchasing speed, BAT is likely to complete the Program for the current year in Sept 2024 .

March 2024

BAT reduced its stake in ITC stake to buyback own shares. BAT sold 436.85Mn ITC shares (~3.5% of ITC’s issued share capital) to institutional investors by way of an accelerated book building process (“Block Trade”). BAT’s ITC shares were picked up by more than 30 institutional investors including mutual funds, pension funds, insurance companies and sovereign wealth funds. The Government of Singapore and ICICI Prudential Fund (51%-49% JV between ICICI Bank and Prudential) emerged as the top buyers of the BAT’s ITC shares. Local sources reported that the Block Trade was executed at an average price of ₹400.4 for a total amount of ₹175Bn. BAT reported that the net proceeds amounted to ₹166.9Bn (£1.57Bn) – implying a gross-to-net difference of 4.6%.

Following the stake sell, BAT’s stake in ITC is reduced to ~25.5% – which is sufficient (>25%) to keep the board seats and veto rights (thereby, the ability to exercise influence over ITC’s strategic direction).

Subsequently, BAT announced the initiation of a £1.6Bn share repurchase program (SRP; ~3% of share capital). The first tranche of the SRP (£700Mn) will last from 18 March 2024 to 31 December 2024. The second tranche (£900Mn) will be executed in 2025. Concurrently, BAT also announced a new leverage target range of 2-2.5x adjusted net debt / EBITDA.

In the first five days of the new SRP (March 18-22), BAT purchased 1.46Mn shares for a total amount of £34.8Mn (average price paid: £23.85). Based on the established purchasing pattern, BAT’s new SRP is set to last around 100 trading days (i.e. £7Mn x 100 days).

Number of shares purchased x Average price paid = Amount

– Day 1: 280k x £23.83 = £6.67Mn

– Day 2: 300k x £24.16 = £7.25Mn

– Day 3: 300k x £23.88 = £7.16Mn

– Day 4: 280k x £23.6 = £6.61Mn

– Day 5: 300k x £23.77 = £7.13Mn

November 2023

In Feburary 2023, BAT announced that the share buyback repurchase is paused to focus on strengthening the balance sheet (deleveraging) in the light of investment plans (to further accelerate transformation), uncertain macro environment, higher interest rates, outstanding litigation and regulatory matters. At the end of 2022, BAT’s Adj. Net Debt/Adj. EBITDA was 2.89x. BAT is likely to re-initiate the program when its leverage (Net Debt/Adj. EBITDA ratio) is reduced sufficiently close to the middle of the 2-3x range.

At the end of June 2023, BAT disclosed £38.35Bn net debt. In the first 6 months of 2023, BAT’s free cash flow (after dividends) was -£153Mn; BAT managed to reduce its net debt by £936Mn thanks to the favorable FX impact. In the same period, adjusted net debt is reduced by £872Mn to £37.26Bn.

Assuming a similar level of debt reduction in H2 2023, BAT’s adjusted net debt could be down to ~£36.4Bn at the end of 2023. Consensus forecast for BAT’s FY23 operating profit (EBIT) is £12.76Bn. Accordingly, we would expect BAT’s adj. Net Debt/adj. EBITDA ratio to be around ~2.7x at the end of 2023 – while not knowing the terms of Russian business transfer (post-publishing note: At the Interim Business Update, BAT confirmed the ~2.7x figure for the end of 2023. At the FY23 Results release, BAT revised the year-end leverage to 2.6x).

Re-initiation of the share buyback program is the most important expectation of many market players. However, a small-sized program (£1Bn) is the maximum BAT can afford for the time being (if ever). Would a modest program be effective in supporting the BAT share price? Should BAT Management avoid caving into the short-term market pressure and focus on debt reduction? These are valid questions that are up for discussion.

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