british american tobacco p.l.c. annual report 2008 - Notes on the accounts: 26 of 31

ANNUAL REPORT 2009

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26 Business combinations and disposals

(a) PT Bentoel Internasional Investama Tbk (Bentoel)

On 17 June 2009, the Group acquired from PT Rajawali Corpora and other shareholders an 85 per cent stake in Indonesia’s fourth largest cigarette maker Bentoel for US$494 million (£303 million). The price is equivalent to IDR873 per share, a premium of 20 per cent over Bentoel’s closing price of IDR730 per share on 17 June 2009. A public tender offer for the remaining shares was announced after the acquisition and was completed on 26 August 2009, resulting in the acquisition of a further 14 per cent share in the company, for IDR855,783 million (£52 million), bringing the total shareholding in the Bentoel Group to 99.7 per cent.

On 20 October 2009, it was announced that Bentoel and BAT Indonesia would enter into a merger plan whereby BAT Indonesia would merge into Bentoel. This was completed with an effective date of 1 January 2010, and the total shareholding in the merged group is 99.14%. The Bentoel name has been retained and the company remains listed on the Indonesian Stock Exchange.

The goodwill of £188 million on the acquisition of the cigarette business of Bentoel, stated at the exchange rates ruling at the date of the transaction, arises as follows:

The book values of the acquired assets have been revalued to fair value as at acquisition date. The main adjustments relate to the recognition of trademarks, the revaluation of property, plant and equipment and inventory and the related impact of deferred taxation.

The goodwill of £188 million on the acquisition of the business represents a strategic premium to enter the large Indonesian kretek market and the anticipated synergies that will arise from combining the businesses in Indonesia.

In the period from 17 June 2009 to 31 December 2009, the acquired business contributed revenue of £105 million and profit from operations of £6 million after charging £4 million for amortisation of acquired intangibles and £2 million in respect of restructuring and integration costs.

If the acquisition had occurred on 1 January 2009, before accounting for anticipated synergies, restructuring and pricing benefits, it is currently estimated that Group revenue would have been £14,291 million and Group profit from operations would have been £4,108 million for the 12 months to 31 December 2009. These amounts have been estimated based on Bentoel’s results for the six months prior to acquisition, adjusted to reflect changes arising from differences in accounting policies and the anticipated effect of fair value adjustments. The amounts reported for profit from operations are after charging £4 million for the amortisation of acquired intangibles for the period to 17 June 2009.

(b) Tekel

On 22 February 2008, the Group announced that it had won the public tender to acquire the cigarette assets of Tekel, the Turkish state-owned tobacco company, with a bid of US$1,720 million. The acquisition only related to the cigarette assets of Tekel, which principally comprised trademarks, factories and tobacco leaf stocks. The acquisition did not include employees and the Group had directly employed the required workforce by the effective date of the transaction. Completion of this transaction was subject to regulatory approval which was subsequently received and on 24 June 2008 the Group completed the transaction subject to finalisation of the purchase price based on agreed completion accounts.

As noted in the 2008 Annual Report, part of the transaction had still to be finalised. This occurred in 2009 with an adjustment of £12 million to the provisional purchase price of £873 million and therefore to goodwill. The goodwill of £578 million (previously £566 million) on the cigarette assets of Tekel, stated at the exchange rates ruling on the date of the transaction, arose as follows:

(c) Skandinavisk Tobakskompagni (ST)

On 27 February 2008, the Group agreed to acquire 100 per cent of ST’s cigarette and snus businesses in exchange for its existing 32.35 per cent holding in ST and payment of DKK11,582 million (£1,237 million) in cash. Completion of this transaction was subject to regulatory approval which was subsequently received on the condition that the Group agreed to divest a small number of local trademarks, primarily in Norway. The transaction was completed on 2 July 2008. The transaction resulted in a revaluation gain of £179 million, included in other comprehensive income for the year ended 31 December 2008, and goodwill of £923 million. The gain on disposal from this transaction and subsequent trademark disposals are explained in note 3(h).

Until the date of the transaction, the results of ST were equity accounted as an associated undertaking and following the transaction, the results of the acquired businesses have been consolidated.

(d) Items classified as held-for-sale

At 31 December 2009, £12 million of inventories and £2 million of current trade and other receivables have been presented as held-for-sale assets and £16 million of current trade and other payables have been presented as held-for-sale liabilities and relate to a non-core business being actively marketed for sale in Western Europe.

At 31 December 2008, held-for-sale assets reflect principally ST trademarks of £182 million which were disposed of in 2009 (note 3(h)) as a condition for regulatory approval of the acquisition of the cigarette and snus businesses of ST, and £18 million of property, plant and equipment in Bologna, Italy which was sold in 2009. Of the £16 million of property, plant and equipment acquired from Tekel classified as held-for-sale at 31 December 2008, £3 million of plant and equipment has been sold in 2009 and £1 million reclassified to property, plant and equipment as the sale of these assets is no longer highly probable. £13 million of property continues to be classified as held-for-sale at 31 December 2009.

The remainder of 2009 and 2008 held-for-sale assets comprises non-core assets in various locations being actively marketed for sale comprising plant, property and equipment of £3 million (2008: £9 million).