British American Tobacco plotting takeover of Imperial Tobacco, sources tell FT

British American Tobacco has put together a syndicate of banks to finance a possible purchase of rival Imperial Tobacco, according to the Financial Times's Alphaville, which cites "people claiming direct knowledge of the process".

There is no certainty that a bid will ever be forthcoming, but a syndicate of lenders willing to finance the buy-out has been put in place.

"With Imperial shares now trading near a record high the company might choose to go pens down rather than risk overpaying," the same sources cautioned.

If one assumes a 30% premium, British American Tobacco would need to shell out in excess of £44bn for its rival, on top of its approximately £13bn in debt, the report said.

Regardless of whether the speculation swirling around a possible bid for Imperial Tobacco from British American Tobacco pans out or not, the organic story and valuation argument are “compelling enough”, Chris Whitman at Whitman Howard said in a research note sent to clients.

"We see rationale for potential industry consolidation in the tobacco as logical given the weak industry sales trends. At one point the threat of electronic cigarettes was a real but we think that this will slowly start to decrease. Now what this has done is given the industry a shock enough to start to work harder to maximise shareholder returns.

"The logical option for this will be for M&A in the sector. Volumes are down, shares are undervalued v a break up scenario, thus far the short term visibility and outlok require some catalyst for outperformace and we see this as a credible outcome. We have seen this news before in the press over the last few months and are starting to see the strategic sense if a deal happens," said Atif Latif, director of trading at Guardian Stockbrokers.