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Imperial Tobacco May Go Hostile on Altadis, Analysts Say

Britain's Imperial Tobacco may turn hostile in its attempt to buy Franco-Spanish Altadisand go directly to its rival's shareholders with its $15.3 billion (11.5 billion euro) cash bid, analysts said on Monday.

Imperial approached Altadis last Wednesday with a 45-euro-a-share bid and looked for friendly talks. But the Madrid-based group rejected the bid late Friday, and a person familiar with Altadis said 53 euros a share would be an "adequate" value.

Analysts said the British group is prepared to break the impasse and try and do a deal at 45 euros and make it the first hostile bid in the tobacco sector if it cannot bring the Altadis management to the negotiating table.

"We believe Imperial will now go hostile since they have already canvassed their shareholders on the issue," said tobacco industry analyst Jonathan Leinster at UBS, who sees a high chance of the bid's success even at the current level.

Hostile bids have been difficult to execute in the tightly regulated tobacco sector and have not been attempted in recent years. Japan Tobacco's deal to buy Gallaherdue to be completed next month was agreed on a friendly basis.

"As there is every chance the two have been in talks before, we see a good chance of Imperial going hostile," said David Liston, analyst at Barclays Wealth.

Shares in Altadis, the maker of Gauloises and Fortuna cigarettes, rose 2.2% to 45.92 euros by 1325 GMT on hopes of a higher bid from Imperial, which makes Lambert & Butler and Embassy cigarettes in Britain, and West and Davidoff in Germany.

Imperial's shares increased 0.7% to 23.46 pounds.

Analysts say Altadis has stated its aim of staying independent, and its Chairman Jean-Dominique Comolli was dismissive of a bid approach just before France's Seita and Spain's Tabacalera merged in late 1999 to form Altadis.

Comolli as chief executive of Seita rejected an approach from Gallaher at a price above the then current Seita price and also the price agreed for the Tabacalera merger.

Speculation has circulated about an Imperial bid for Altadis over the last 27 months and although analysts in London say Imperial could bid up to 50 euros for Altadis, Imperial may have to go hostile to force Altadis' hand, they added.

Imperial is still insisting it is looking for friendly talks with Altadis to hammer out a deal, as it prepares to give its routine trading update to the London market towards the end of it half-year on Wednesday March 21 at 0900 GMT.

"We are discussing the Altadis reaction and look forward to progressing further friendly dialogue," said a spokesman.

A deal would join Imperial and Altadis as the world's fourth- and fifth-largest cigarette groups, creating big cost savings and closing the gap on the top three groups Altria, British American Tobacco and Japan Tobacco.

With half of Altadis shares held by British and American funds, these -- such as Altadis's top three shareholders Franklin Resources, Templeton and Fidelity -- will be key, and Franklin has said it would support Imperial's bid for Altadis if there were no other alternatives.

Analysts noted that "white knight" bidders for Altadis are in short supply with Altria ruled out on competition grounds, BAT regarding acquisitions as being expensive and Japan Tobacco currently occupied with its takeover of Gallaher.

A spoiling bid from Altria for Imperial is seen unlikely due to big competition problems, analysts said.

"We believe the acquisition of Imperial Tobacco by Altria Group , including Altadis as a joint bidder, remains an unlikely scenario," said UBS's Leinster.

He points out that Altria and Imperial together would have a 54% share of the European Union tobacco market and will face significant competition concerns.

Without any disposals, an Altria-Imperial combination would be number one in virtually all EU markets, be three times the size of its nearest competitor, while it would cause competition concerns in the U.S. and Australia, analysts added.

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