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Tobacco giants close to rescue deal for troubled Palmer and Harvey

Two of the world's biggest tobacco manufacturers are nearing a deal to shore up the finances of Palmer and Harvey (P&H), the cash-and-carry group that is a crucial part of Tesco (Frankfurt: 852647 - news) 's UK supply chain.

Sky News has learnt that Imperial Brands (LSE: IMB.L - news) and Japan Tobacco International (JTI), which between them own brands such as L&B and Silk Cut, are preparing to strike an agreement that will involve providing "substantial" financial support to P&H.

Sources said that any agreement, which has yet to be signed and could still fall apart, was unlikely to involve the cigarette makers taking shares in the company - an option that has been explored within the last fortnight.

One insider said that concerns about the UK's two biggest tobacco companies also controlling a critical part of the industry's supply chain had emerged during some of the discussions about P&H's future.

Instead, JTI and Imperial are expected to focus on standing behind P&H's borrowings through some form of guarantees, the details of which were said to be still evolving on Thursday.

The progress of a refinancing deal comes as Tesco, which accounts for 40% of P&H's revenues, prepares to sign a new contract with the cash-and-carry group.

Details of the new arrangements were unclear, although sources suggested that Tesco was likely to formally agree them with P&H in the coming weeks.

A wider deal to secure the future of P&H will come as a relief to the roughly 4,000 people who work for the company.

A JTI spokesman said: "We are continuing our discussions with the Palmer & Harvey management team to develop future business plans.".

An Imperial Brands spokesman declined to comment, as did Tesco and P&H.

Sky News revealed earlier this week that P&H, which manages all of Tesco's tobacco distribution in the UK as well as logistics for its One Stop convenience chain, had parachuted in a corporate restructuring veteran to steer it through the talks with lenders and creditors.

Andy Leeser, who has worked on complex turnarounds at companies including LA Fitness, the gyms chain, and UK Coal (Other OTC: UKCLF - news) , was installed this month as P&H's chief restructuring officer.

P&H is one of the UK's largest private companies, recording annual revenues of more than £4bn.

Lenders to it, which include Barclays (LSE: BARC.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) , have become increasingly anxious about the potential ramifications of Tesco's proposed £3.7bn acquisition of Booker.

The extent of P&H's revenues dependent upon the UK's biggest retailer has stoked fears that the business could shift to Booker if the takeover is completed.

P&H called in FTI Consulting (NYSE: FCN - news) , a professional services firm, to provide advice on a refinancing of the company earlier this year.

A spokeswoman for P&H last week declined to comment beyond an earlier statement saying: "As part of the planned refinancing process, we are in constructive discussions with our lenders and stakeholders.

"The company believes it is well-placed to take advantage of the many opportunities that the market currently presents."

A crisis at P&H would be damaging for its employees, many of whom own shares in the company, as well as its customers.

It would also be unwelcome for Tesco, since it could undermine its argument that the Booker takeover would not infringe competition in Britain's grocery supply industry.

Booker owns the Budgens and London fascias, although Tesco has argued that they are operated using a franchise model, and should not be used to justify rivals' arguments that the deal is anti-competitive.

The Competition and Markets Authority is widely expected to refer the deal to a so-called Phase-II inquiry, which would elevate it to the most rigorous level of anti-trust scrutiny.

P&H was established in 1925 as a tobacco and sweets wholesaler, and is the biggest distributor to the UK's convenience sector.

It serves about 90,000 outlets across the country, using a fleet of 1,300 vehicles.

The company is run by Tony Reed, a former boss of Tesco's convenience retailing business, who joined just a few months ago.