SECRET
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.nTRCHASE OR SALE OF IMASCO SHAAS
General
Canadian trust and loan companies legislation may significantly restrict the
Group's ability to buy or sell Imasco shares. Assuming that the necessary,
consents can be obtained the following possibilities have been examined.
1. The sale of the whole of the Group.s Luasco holding would have a severe
effect on Group published profits and the resource generated would be
limited by the substantial tax burden on disposing of the Wastanley
holding.
2. The sale of the MM Imasco holding would not significantly reduce
Group profits and create resource in the US. (The tax problems an the
sale of the Westanley shares doom not arise and in fact a sale of the
RATUS shares would solve the problem of tax on the Imasco dividends.)
3. Increasine the Group holding in Imascg to iust over 50% is affordable u;A--A-1
(*---U'1 and would substantially increase pro and post tax profits. The
attributable profit effect is small.
4. Increasing the Group holding to 1001 would only be affordable if the
Trustco divestment is accelerated and other disposals are carried out.
, fA rf ALhJLA
The discussions of twe options are in general terms. If it is decided to
develop them further rk will be necessary. In particular the location of
a holding company to acquire further shares in IMRSCO deserves careful study
in the light of the adverse affect of US tax reform on dividend receipts
from Canada and the very low UK tax relief on acquisition interest. If as a
result of these preliminary findings it is decided to pursue the option to
acquire 1001 of Imasco much more time will need to be devoted to quantifying
t "*is P to UA@Ao @%, NJ AjAj j) few, 1) 6,4-q_f i t
Trust and Loan Companies Legislation
Because of the Imasco ownership of Canada Trustco the Group dealings in
Imasco shares may be restricted. Mr Crawford believed that under the then
Loan Companies Act Inasco would have been unable to purchase Genstar if BAT
had owned more than 501 of Imasco.
I understand that under the existing legislation the position ts obscure but
has been clarified in the latest draft of the Trust and Loan Companies Act.
1. If BAT should decide to sell Imasco shares, ministerial approval will
be required to sell more than a 10% holding in Imasco to a -4-pl - S t1-1
purchaser.
2. If BAT should decide to buy shares in Imasco, ministerial approval will
be required if the purchase increases the BAT holding in Imasco.
Participation in rights issues are thus presumably possible without
ministerial authority, but permission would be required were BAT to
seek an increase in holding over 40%. M)
C)
M)
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BAT Industries document for Province of British Columbia 13 April 1999

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it is not poss-lible to say what the ministerial attitude would be to any
proposal put forward by RAT. However it may be appropriate to note that the
ownership of :--ust and loan companies is currently a sensitive issue in
Canada. Both opposition parties and the influential finance committee of
the Canadian -.Ouse of Commons favour a 10% limitation of ownership of these
companies and imasco regards itself as fortunate in being able to keep a 651
interest in Tzjstco. It may be that the only way an overseas company could
acquire a controlling interest in Imasco would be with the support of
Imasco. I Imasco's lobbying was successful in enabling Imasco to keep 65% of
Trustco.)
Disposal of all the Group Imasco Shares
The current I=asco share price (4 February 1998) is C$25.125 so that RAT's
total holding would be valued at 01211 million or C541 million at C$2.24 to
the E. However a substantial capital gains tax liability would arise in
Wastanley which at at 35% rate amounts to C115 million, leaving net proceeds
of C426 million. (There may be a small tax loss on the sale of the BATUS
shares which could be used against capital profits elsewhere, but this has
been ignored in arriving at net proceeds.)
Because of the Genstar acquisition the Group share of the not tangible
equity of Imasco at 31.12.87 is only estimated at C$90 million or
E40 million so that a surplus on disposal of some E386 million will arise.
The effect on :he Group do'bt/equity ratio would be as follows at 31.12.88: -
Sale of Imasco
zlim Shares Adiusted
Gross debt -426
Shareholders funds 4943 +386 5329
7-g-q% V11
Debt/equi--,v ratio zswev 18.8%
The total resource generated by the sale would be about E620 million
(E426 million cash and borrowing capacity.of C200 million assuming a
'A debt/equity, ratio of Atr of the increaseA IA Group equity.)
W1. OL
Investment of the E426 million at - say - ton percent interest will produce
C43 million pre-tax. It is difficult to say what the tax rate on this
income would be, but even assuming 7%, the Group's published profit would be
severely impacted. In the table below no account has been taken of the
withholding tax and US income tax on the Imasco dividends, 'U'CA,
Imasco 1988 budget Income on disposal Shortfall
@ E-2.24 proceeds
E millions E millions
rQ
Pre-tax profit 107 43 64 C)
Taxation (34) LI) LID Nj
After tax prof'it 73 40 33 -1-4
Minority interest LU) In) -
62 40 22 C)
C)
BAT Industries document for Province of British Columbia 13 April 1999

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From an annual cash flow,perspective the Group share of the Imasco 1
ale of
dividends forgone before'vithholding tax is C22 million so the s /e
Imasco shares would miwpeaa Group cash flow in the short term. The p cise
amount of the improvement would depend on the actual paid -a zhe income
earned on the disposal proceeds and to a lesser extent the UK and US tax on
the Imasco dividends that would no longer be p"h&eO_AZ_1_J-
It may be that higher proceeds than market price could be obtained if all
the Imasco shares were sold to a single purchaser that would be in a
favourable position to gain control of Imasco. The amount of any premium
may, however, be small because of the difficulties stemming from the
Canadian trust and loan companies legislation.
Diszosal of the Ems investment in Imasco. but not Westanlevir
BATUS has 12.26 million common shares in Imasco which would produce
C$308 million or E138 million at a price of 025.125 each with a tax
advantage rather than a tax liability. This would result in a surplus on
disposal of C128 million. Assuming the proceeds can be offset against debt,
the Group debt/equity ratio f OMPA"s as follows:-
de. v - I't -1 '.A 6 41j-"
Sale of T-Aft-o
LIAB Shares Adiusted
t-uji(4-
Gross debt 1W -138 im
Shareholders funds 4943 +128 5071
,.i -j IL
Debt/equity ratio 2910V 25.4%
The total resource generated by the sale would be about C200 million
(C138 million plus a borrowing capacity of C64 million assuming a
debt/equity ratio of 501 on the increaseol@,r,"'up equity-)
As a result of the US tax reform BALTUS is likely to suffer a heavy US tax
burden on dividends received from Imasco. This can be mitigated slightly by
reducing the BATUS holding in Imasco to under 101, but US tax plus Canadian
withholding tax will still amount to about 50% of gross dividends.
Taking this factor into account the effect of the sale of the BATUS
investment in Imasco is AS follows: -
1988 profits
&rising from Income on
BATUS holding disposal
in Imasco proceeds Shortfall
C millions f millions
5 k-'14 LI (40Pre - tax profit 27.2 13.8 13.4 PO
5k@j el 1,,Aas Taxation (8.6) (4.7) ('3 9V CD
Tax on dividend L") kI: ) r10
After tax profit 15.8 9.1 6.7 1-4
Minority interest LL-8) 12-1) -
Attributable profit 22A -LI -2-2 CD
%O
CD
BAT Industries document for Province of British Columbia 13 April 1999

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The shortfall in profit at the attributable level is E3.9 million though
higher amounts are involved at the pro and post tax levels. These amounts
are on the assumption of a 10% pre-tax return on the proceeds from disposal,
and at the after tax level shortfall increases by E1.8 million on the
assumption of 8% pre-tax income.
Group cash flow is positively affected in that the RATUS after tax dividend
receivable for 1988 from Imasco will only amount to E2.8 million.
Purchase of an additional 10% of Imasco to secure a 51% shareholdiny'
The acquisition of an additional 10% of the Imasco common shares would give
RAT control and substantially improve Group profits at the pre and post tax
levels :9 nogligiblee-a-t-ft@'he'attributable level.
At C$30 a share the cost would be C$357 million or E160 million. The effect
of the purchase on the Group 1988 budget would be as follows:-
Imasco as a Imasco
50.4% owned Acquisition as a 40%
subsidiary Interest associate Yet affect
C million E million E million C million
Pre-tax profit 264 (16) (107) 141
Taxation UL4) 1 34 LOD
After tax profit ISO (15) (73) 92
Minority
- direct 28
- 49.6% 2A
Attributable profit 76
Note If a way could be found of getting acquisition interest
allowed at 35% for t attributable profit would increase by
C5 million. ax;
The goodwill arising from the purchase would be about E150 million. however
for debt/equty ratio purposes the Imasco and Trustco minority interest would
rank as shareholders funds. These are fairly substantial amov.d that are
estianted below.
CS millions
Imasco preference shares 206
51J, AO-I% of Imasco shareholders equity 112
Imasco finance corporation (estimate) 11-0
C million @ 2.24 370
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BAT Industries document for Province of British Columbia 13 April 1999

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-of-60% of Imasco so as to secure a loo@ interest in Imasco
C.911
If the Group should decide to acquire the VhoJ4 of the outstanding shares of
Imasco a premium of 20% or CM a share might-be appropriate. On this basis
the total cost would be C$2146 million or C950 million and goodwill would be
C890 million excluding any possible gains on revaluations for fair value
purposes.
The effect on the Croup debt/equity ratio at 31.12.88 would be as follows:-
Purchase of
Plan 60% of Imasco Adjusted
E million C million f million
Gross debt 1@2_7 9 5 0 + UVA 34"."
Shareholders funds 4943 -890 + 370 "23
II&/ E 29% .act ;s%
Vry P tA4 -,-Li 4-4
Beca(ipe of-vhe er puzzbase consideration t-bAre !@q@d prohably%,be, a 6@,6""-ej
s4inifiriant - eC't_RA_Gf-O(zp-Mzi>@E4@Prof` rt-S.
TMARCO as I=asco
100% owned Acquisition as a 40% Talent.&
subsidiary Interest associate Net,effect
E million E million C million E million
Pre-tax profit 264 (95) (107) 62
Taxation 24) 33 34 SID
After tax profit 180 (62) (73) 45
Minority DA) __Z_ __11 LL7)
Attributable profit
Th, incg@ase in attributable profit is entirely due to
L
getting relief on acquisition interest.
However if Imasco were to be consolidated with B.A.T Industiret it would be
necessary to include apprV tely C$340 million Imasco Finance corporation
. a?
debt with the anticipated an heat debt at 31.12.88 amounting to
C$24,87. Together they amount to CL150-s4ILLoa% eN.11.1- file,., ltt@l
The effect on the Group debt/equity ratio is as follows at 31.12.88: -
Purchase of
Plan 10% of Ima.sco Adjusted
E million E million C million
1% re ro
Gross debt ILE 160 + 1-M lar- I 0. % A. C)
Shareholders funds 4943 -150 + 370 5163 M.)
29% .5-W 5-6
C)
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C)
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BAT Industries document for Province of British Columbia 13 April 1999

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56
The 5?% would seem to be a slight overstatement in that by 31.12.88 there
would be included as equity retentions of C40 million if 1988 profits are
achieved and plan dividends are paid. 'Also there would be some abatement of
the goodwill because of "fair &.11M accounting".
V A"
The incremental dividends that the Group would receive as a result of Cho
additional investment of E160 million to achieve control would be
E5.5 million gross: this is short of acquisition interest to finance the
additional investment in Imasco. There may be some scope to increase the
Imasco dividend after acquiring control. However any increase would have to
be at arms length because of the large 49.06% minority. A 10% increase on
the Imasco plan dividend would yield an extra O million gross if RAT had a
holding of just over 50%.
A very large minority interest in Imasco would also presumably preclude the
Group from making major restructures and disposition of Imasco businesses.
However it does seem that the Group could afford to offer as much as C$30 a
share to achieve control of Imasco. The affect on Croup pro and post tax
profits would be substantial and the effect on attributable profits -IA%W
nsei rib". It would however be some time before cash flow from Imasco
-14-vLdends covered acquisition interest.
P D Lovejoy
PDL/PAC/Laasco-shares
9 February 1988
-4
BAT Industries document for Province of British Columbia 13 April 1999