Goldsmith Prepared to Make $20.6-Billion Bid for BAT

An investment group led by British financier Sir James Goldsmith said Thursday that it would be prepared to launch a cash and paper bid of $20.6 billion if U.S. regulators allowed it to acquire Britain’s BAT Industries.

But the group emphasized that it is under no commitment to make the hostile offer, which, if successful, would be the world’s second-largest takeover ever after the $25-billion leveraged buyout of RJR Nabisco.

The statement by Goldsmith’s Hoylake Investments group was needed because state insurance regulators have demanded details of how the takeover would be financed before approving or rejecting a change in ownership of BAT’s Farmers Group insurance subsidiary. Hoylake has agreed to sell Los Angeles-based Farmers immediately to Axa Midi Assurances, a Paris-based insurer that is also an investor in Hoylake.

But Hoylake put the offer only in hypothetical terms because British investment law allows only 60 days to complete a formal offer once announced. That in effect would doom any formal deal launched prior to receiving regulatory approvals in the nine states where Farmers’ insurance subsidiaries are based.

Acknowledging that regulatory hurdle, Britain’s Panel on Takeovers and Mergers allowed Hoylake to let its original, all-paper offer lapse and granted the consortium the right to make a new offer within 21 days of obtaining insurance approvals.

Hoylake said it is “making its best efforts” to win those approvals and “firmly intends to make a new offer.” But it added that it can only go so far in outlining takeover terms without creating a new offer that would begin the 60-day countdown under British law.

The need for the hypothetical offer was created Tuesday when Arizona’s insurance department canceled a hearing on the bid, scheduled for Dec. 4. The department demanded financial details before it could assess the impact on Farmers. Arizona’s concerns are shared by regulators in some other states.

Hoylake said the amount of an actual offer could be reduced if BAT carries out its announced plan, overwhelmingly approved by shareholders, to sell its paper-products subsidiaries and retailing interests, which include the Saks Fifth Avenue and Marshall Field department store chains and the Breuners furniture rental stores. BAT expects to realize about $4 billion from selling those units. BAT is also one of the world’s largest tobacco companies.

Under the hypothetical terms filed Thursday, Hoylake said BAT shareholders would receive 20% of their payment in securities convertible into Hoylake-related equity. The remaining 80% would come in the form of senior notes or cash. Depending on market conditions, Hoylake said, shareholders might also be offered an all-cash option.

Necessary cash would be raised through loans from banks and other institutions as well as tapping the resources of Goldsmith and his major investment partners--financiers Jacob Rothschild and Kerry Packer as well as Axa Midi, among others.

A Farmers spokesman dismissed the filing as “a debt-laden, hypothetical scheme.”