OPINION | Quitting London might do little for BAT shares

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It’s tempting for investors to look for a quick fix to light up BAT stock. But moving its main listing to New York may not provide it, write Matthew Brooker and Andrea Felsted.

News that British American Tobacco (BAT) is under pressure from at least one leading shareholder to join the drift of companies abandoning their UK listings for the US is enough to give officials at the London Stock Exchange a coughing fit. The loss of BAT would be a body blow for the capital’s market, depriving it of an $80 billion FTSE 100 Index stalwart — albeit one in a sunset industry beset with legal and regulatory overhangs rather than a racy technology leader like Arm. The logic of this defection is less than wholly convincing, though.

The argument in favour is straightforward. London-headquartered BAT is an increasingly US-centric business. The share of revenue from its biggest single market rose to 45.7% last year, from 21.3% in 2017. The company’s Europe and North Africa segment, which includes the UK, accounted for 22.9%, down from 31.2% five years ago. A more appropriate name at this stage might be American British Tobacco. Neglected by its home country investors, BAT’s trading volume has declined, and a valuation gap has opened with New York-listed Philip Morris International.

BAT, owner of the Pall Mall and Lucky Strike cigarette brands, reported higher revenue and operating profit than Philip Morris last year, but its equity value lags far behind. At $149 billion as of Friday’s close, Philip Morris’s market capitalization is more than 80% greater. Moving the primary listing to New York would bring BAT closer to its biggest shareholders, give the company readier access to a deeper pool of liquidity and potentially help to narrow the valuation differential. It makes no sense for the cigarette maker to remain on the UK stock market, Rajiv Jain, chairman of BAT shareholder GQG Partners, was cited as saying by the Financial Times.

That tells only part of the story. It’s questionable whether the valuation gap is really a function of where BAT is listed. Philip Morris may be traded in the US, but its business is outside the country. The company separated in 2008 from former parent Altria Group Inc., which retained the US operations. BAT has continued to trade in line with New York-listed Altria, based on earnings multiples. That’s arguably appropriate, given both are US-dominated businesses.

In reality, business fundamentals probably have more to do with the valuation disparity than geography. Altria has suffered from its disastrous $12.8 billion investment five years ago in Juul Labs, the electronic cigarette maker that was accused of targeting under-aged users. The company divested its stake in Juul earlier this month after writing down its value.

Click here for BAT's share price and other data

Philip Morris, meanwhile, has been quicker to develop the potentially less harmful alternatives to cigarettes on which the future of big tobacco depends. It leads the pack, primarily through its IQOS device that heats rather than burns tobacco, which has been notably successful in Japan. Last year, Philip Morris acquired nicotine pouch maker Swedish Match AB for about $16 billion. This not only added another non-combustible strand to the business but, via US distribution, enabled Philip Morris to regain a foothold in the biggest market for tobacco alternatives, 14 years after the Altria split. It also struck a deal with Altria last autumn to distribute IQOS in America.

Smoke-free net revenue accounted for a third of the total at Philip Morris last year, and the company aims for more than 50% by 2025. At BAT, the equivalent share in 2022 was only 15%. While the company is catching up — with products such as Vuse electronic cigarettes, glo “heat not burn” products and Velo nicotine pouches — it faces other challenges, such as the Food and Drug Administration’s proposed ban on menthol cigarettes. These account for about 35% of BAT’s US revenue, and 16%-17% of overall sales, according to Duncan Fox, analyst at Bloomberg Intelligence. As Philip Morris doesn’t sell cigarettes in the US, it isn’t at risk from this potential rule, which has weighed on BAT shares.


Moving the listing wouldn’t be cost- or risk-free. It would mean giving up the company’s FTSE 100 constituent status, with no guarantee of being included in an equivalent US benchmark. Some UK funds with domestic mandates might be forced to divest if BAT quit London. The impact on relative investment flows and tax treatment are among other factors that would have to be considered. A US primary listing would require approval from 75% of BAT shareholders, so it looks unlikely absent a groundswell of support for GQG. Investors in the US market already have access to BAT stock through its American depositary receipts (the company also has a secondary listing in Johannesburg). 

Preparing for a world beyond smoking takes time and investment, and regulatory challenges are never far away. It’s tempting for investors to look for a quick fix to light up BAT stock. New York may not provide it.

Matthew Brooker and Andrea Felsted are Bloomberg Opinion columnists.

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