Investors Fear Regulatory Probe Because Deal Involves Junk Bonds : BAT Stock Falls in Wake of Huge Buyout Bid

LONDON —  Shares of BAT Industries PLC slipped Wednesday on talk that the massive $21-billion buyout of the company proposed by Sir James Goldsmith is being financed by junk bonds and may spark opposition from regulators.

BAT stock closed off 37 cents (23 pence) at $14.18 (8.70 pounds) per share on the London Stock Exchange. In New York, U.S.-traded shares closed 25 cents lower at $14.125. Volume was heavy in both markets.

The selloff came on fears that British regulatory authorities might launch an investigation into Europe’s largest-ever takeover offer because the bid was cashless, analysts said.

They also said many British investors, conservative by nature, would resist the bid because it offers loan notes, or junk bonds, that will be repaid by carving up and selling pieces of the huge BAT conglomerate.

Others said the price was too low.

“If this were put out in the U.S., it would go very well. Over here there’s a culture clash, the (London) market is not comfortable with debt,” said Anton Simon, a high-yield portfolio manager at National Commercial Bank of Saudi Arabia.

Chance of Investigation

A London bond dealer added: “Holders of BAT shares are unlikely to sell because there is no cash content. They won’t want junk paper.”

Junk bonds are high-yield, high-risk securities that have become popular in financing takeovers in the United States.

Analysts and bankers said there was a growing chance the bid would be referred for investigation to the British Monopolies and Mergers Commission or that the Bank of England could step in because of the offer’s leveraged nature.

BAT, Britain’s third-biggest company, quickly rejected the takeover bid when it was announced Tuesday.

In its first strategic move after rejecting the offer, BAT said Wednesday that it appointed investment bankers Goldman Sachs & Co. and Shearson Lehman Hutton Inc. as its U.S. advisers.

BAT may look to American courts and insurance authorities to block the bid, analysts and legal experts said.

Goldsmith, who is working with two partners, has pledged to break up the conglomerate and sell off its non-tobacco interests, starting with the U.S. insurance company Farmers Group Inc., which BAT won after a bitter takeover fight last year.

But BAT’s suitors could get held up by regulatory issues that delayed its purchase of Farmers.

“Our law requires that, no matter what, before any change in control of a domestic insurance company, there must be a review,” said Lorraine Johnson, senior staff counsel to the California Department of Insurance.

While most reviews take 60 days, BAT and Farmers battled it out for almost nine months, Johnson noted. Goldsmith and BAT could easily wage a war of that length, she added.

Takeover Wave Feared

Hoylake Investments, the takeover vehicle controlled by Goldsmith, Australian businessman Kerry Packer and Jacob Rothschild, a member of the famous banking family, has valued BAT shares at $13.86 each.

The offer marks the first time that aggressive finance and break-up strategies pioneered on Wall Street have been used by corporate raiders in the London market.

Politicians and business leaders expressed fears that the tactic would start a wave of takeover bids for giant companies in Britain and on the Continent.