British American Tobacco Annual Report 2010 - Note 25

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25 Cash flow

Cash generated from operations

Profit from operations includes charges in respect of Group restructuring and integration costs referred to in note 3(e). These are also reflected in the movements in depreciation, amortisation, impairment, inventories, receivables, payables and provisions above and in the proceeds of disposal of property, plant and equipment shown in the Group cash flow statement. The net cash outflow in respect of the Group’s restructuring costs was £193 million (2009: £173 million), of which £219 million (2009: £187 million) is included in cash generated from operations above.

Cash flows from investing activities

(a) Purchases and proceeds on disposals of investments

The purchases and disposals of investments (which comprise available-for-sale investments and loans and receivables) comprises a net cash outflow in respect of current investments of £1 million (2009: £37 million inflow).

(b) Purchase of Bentoel

In 2009, the net cash outflow of £370 million on the purchase of Bentoel reflects the settlement of the purchase consideration for an initial 85 per cent stake followed by the acquisition of a further 14 per cent from non-controlling interests, together with related acquisition costs and the acquired cash and cash equivalents and overdrafts.

(c) Purchase of Tekel cigarette assets

The £12 million outflow in 2009 in respect of the acquisition of Tekel cigarette assets reflected the final payment made at the conclusion of the acquisition.

(d) Proceeds from ST trademark disposals

The cash inflow in 2009 reflects proceeds of £188 million from the disposal of a small number of ST trademarks in Norway, the payment of the related disposal costs of £3 million and a £2 million refund of the original purchase price.

(e) Purchases of other subsidiaries and associates

In 2009, the £1 million outflow principally arises from equity investments in associate companies.

(f) Proceeds on disposal of subsidiaries

The proceeds on disposal of subsidiaries reflects the consideration received, less cash and cash equivalents disposed of, from the sale of the Group’s Belgian distribution business, Lyfra NV, as explained in note 26(a).

Cash flows from financing activities

(a) Purchase of non-controlling interests

The cash outflow of £12 million in 2010 arises from the acquisition of non-controlling interests in Bentoel of shareholders who did not wish to participate in the merger of Bentoel and BAT Indonesia as well as non-controlling interests in subsidiaries in the Eastern Europe region.

As a result of the revision to IAS 27, the purchase of non-controlling interests is now classified under IAS 7 as a financing activity. This change is applied prospectively from 1 January 2010.

(b) Cash flows from borrowings

In May 2010, the Group repaid a €525 million bond. The repayment was financed from debt issued in November 2009.

On 25 June 2010, the terms of €470 million of the €1 billion bond maturing in 2011 were modified by extending the maturity to 2020; at the same time, the Group issued an additional €130 million bond with a maturity of 2020. In addition, €413 million of the Group’s €750 million bond maturing in 2012 was purchased and cancelled. At the same time, the Group issued a new £275 million bond with a maturity of 2040.

During the year the Group’s subsidiary in Brazil received proceeds of £410 million (2009: £293 million) from short-term borrowings in respect of advance payments on leaf export contracts and repaid £297 million (2009: £241 million).

During 2009, the Group had re-established its euro commercial paper programme (ECP). However, the ECP programme was undrawn at 31 December 2010 whereas, at 31 December 2009 £187 million of ECP was outstanding.

In February 2009, the Group repaid a €900 million bond which was financed by bond issues during 2008 and cash generated from operations.

In May 2009, the Group repaid Malaysian ringgit (MYR) 100 million which was refinanced in August 2009 by a new MYR250 million bond, due 2014. The additional proceeds were used to repay MYR150 million in November 2009. During June 2009, the Group also issued a new £250 million bond maturing in June 2022.

In September 2009 and October 2009, the Group repaid its €359 million and €759 million credit facilities used to finance the acquisition of Tekel in 2008. The €759 million was refinanced by a new €700 million term loan facility with a maturity date of 31 October 2012 with an option to extend it to October 2013, at the discretion of the banking participants in the syndicated facility. In December 2010, the €700 million term loan facility was partly repaid and the remaining term loan facility of €450 million was extended to October 2013 with the Group able to negotiate improved pricing.

In November 2009 the terms of €481 million of the €1 billion bond maturing in 2013 were modified by extending the maturity to 2021. At the same time, the Group issued an additional €169 million bond with a maturity of 2021. In addition, £199 million of the £350 million bond maturing in 2013 was purchased and cancelled; at the same time the Group issued a new £500 million bond with a maturity of 2034.

(c) Derivative financial instruments

The movement relating to derivative financial instruments is in respect of derivatives taken out to hedge cash and cash equivalents and external borrowings, derivatives taken out to hedge inter company loans and borrowings and derivatives treated as net investment hedges. Derivatives taken out as cash flow hedges in respect of financing activities are also included in the movement relating to derivative financial instruments, while other such derivatives in respect of operating and investing activities are reflected along with the underlying transactions.