Tobacco Documents Online

M~ISOt~ LAZ~RD & CIE LAZARD FRERE$ I~I, Bov.levsrd Haus~m~m 750~ - PARIS Serial nmnber / N~ ¢or~r~: Se~der ! E~,~,,,~: C-files de Mzzh~ede To ! x : BAT Indu.Tai~, London Mr. Ulrich He, tree Mr. Nick Brookes Mr, ~o~ (44 7I) 222 40 94 (44 71) 233 17 92 (44 '71) 233 I'7 96 For suy problem, p|ease telex ~ or phone ~ : 03) 1 - dd 13 O1 ~: 03) l-4S02250

.ranuary 31, 1994 To : Ulrich Hotter Nick Brookes, Edouard Ettedgui From : Fraagois de Combret your meeting with ,I.D. ComoIli on February 3d This m~no summarises the main background elements we bdieve may be ofuse in view of your scheduled meeting with I.D. ComoLli on February 3d. 1) Privatbation policy of the French government . Seita within the privatisation policy We have been in touch with all senior deeidon maker~ in the French admires" tration involved with Seita's privatisation. They have all made it clear that Seita's privatisation is not on the governmenfs priority llst, and that the government has not yet defined its policy regarding this issue. A number of significantly less controversial large scale priv~sations are already scheduled in 1994 so that the government can meet its targets as regards the privatisation program without needing to include Seita :l tb~s year's program. It is our understanding that the goverranent would rnzher pog~pone Seita's pfivatisadon to a~er the next French presidential election, scheduled to take place in May 1995, than run the risk of~y con~'oversy with any of" Scita's main constituencies (tobacconists, leaf farmers, smokers, ~nployecs of the firm) or on the poetical level. • Specifics ofSeita's prlvatisatlon Among the specifics of Seita's privatisation, the following will have a major influence on how the process is handled • - Seita is a company with two major fields of activity - cigarette production and eigaxetle distribu~on - plus a number of side ae*dvities (matches, ciga~ are the main). Neither the government nor the company's m~agemem a.,e considering creating distinct legal entices for these various activities, so that an investment in Seita will have to be - for the time being - a~ investment in the company as it is.

- Defense of the tobacconist monopoly vs EEC has been strongly ~adorsed by the Fren~ C~ve~nm~mt, giving an indication of SEITA importance to fl~e French authorities. - It is most likely that the government will want the State and/or State owned entities to initially r~tain a very substantial shareholding in ~e Company (at least a blocking minority of ILZd, pos~'bly a majority). - A f'orei~ inveh'Ipr should ncttJao~e to gain m.o.re @~.~ limited minority_ stake at the OUtSet. Although the law does not set a limit for EC investors, nor for any foreign investor when the privatisatioa is organis~d within the framework of a business cooperation agreement, our experiencs with r~cent pdvatisalions has made it clear to us that the French goverrmaant will be very reluctant to sell a large stake to a foreign investor, particularly in = case ~s sev, sltive politically spiking as Seita is bound to be; 2) Sug~ated approach We believe B.A.T should envisage a two step approach to Seita's privatisafion if'it wants to achieve something within the next yew or so : - B.A.T would initially acquire a minority, stake in Seita (possibly about 20 % but most likely less than 33 I3 %), on the basis of a business cooperation agreement that would reflect both parties' managements' views ; - i~ would then, after the Presidential election, be in a position to reach over time its ultimate go~l, i.e. control of Scita's ci~tr~c ac~b,itics. These will, in our v/ew, be the key ~sues in the initial sta~e : - from the government's point ofview : • B.A.T should be Seita's managemem's preferred choice • B.A.T's involvement should not put the mail monopoly at increased risk, • B.A.T should bring production volume to Seita plants, ha recent yeats, Sdta has very substantially cut its workfor~ and diminished the number of plaras it operates without creating major unrest ; B.A.T's involvement shoutd be viewed as a plus in this approach, and not as a source of increased tension on produ~-tion jobs. - from Scita's management po/n'( o/'v/~-,v : • Seita's rnanag~nem sees the merits of co-operating with a major tobt~o ~ompnny - but does not feel its survival depends on such a cooperation ; it will thus not be ready to sacrifice too much ofits independence to establish such ~ cooperation - all the less since its financial situation is sound ; • B.A.T's cooperation with Seita should enh.~mce the development perspectives of B.A.T brands such as Lucky" Strike on the French market, and of Selta brands on internatioml markets ; it could also include extensive coop~'ration in Spain, Italy and Africa ; • B•A.T should contribute some production votum~ {see above).

- fi'om B.A.T's point of view • • B.A.T will waat to limit its risks in case it does not ultirna~ely reach its fma~ goal i.e. controlRag Seita's cigarette activities. This mc~ns ~ is should ~ve as clear a vision as possible on the conditions in which it could sell its stake, and that the business agreements be conceived so they should be a strong incerrtive for Seita to further cooperate, whilst not entangling B.A.T with it in case the second step fails. . ¢v~t ifB.A.T's stake is limited, it can aim at an agr~ent including substantial (B.A.T board members, involvemerg in the manasment of tobacco activities). In addition to B.A.T, the governrner~ ~gtrt warn other investors to buy a stake in Seita. We believe that B.A.T could participate, with Sd~'s mamg~m~t, in the discussions about such potential pamaet~, so as to contribute to the design of a suitable grcup of core shareholders. We have already suggested a few possibilki~s in this reSl~, but do not recommend that this issue be addressed with ComoRi during the February 3d meeting unless he brings up the topic l~msel£ Even in that case, we would recommend not to mention the Fran~:aise des ~'eux possibility yet. '~/e thus r~.ommend that B.A.T's initial comac:,s with I.D. Comolli be focused on the business vision B.A.T and S¢ita can share, and on what cooperation with B.A.T could briag to Seita. B.A.T should not h~h~t¢ going again through the beans and minds stages it initially went through with B. de C-all& B.A.T's priority should be to build a p~'sonal, con~dem relationship with Comolli.