The Ministry of Finance, which owns just over 50 percent of the $62 billion former state monopoly, is selling 333 million shares, according to a regulatory filing on Monday, with the deal to be priced between March 11-13.
The offering, the largest such deal since the U.S. Treasury's $20.7 billion sale of American International Group Incshares in September, comes as Japanese equities scale their highest levels in more than four years.
Japan's parliament in 2011 passed a set of bills including tax hikes and government share sales in state-owned companies to help finance the roughly $270 billion it expects to spend to rebuild the northeast coast after the quake in March that year.
Reuters reported early last week that the stake sale would be launched within days.
Conditions for a sell-down in the government's stake in Japan Tobacco have improved in recent months, with the benchmark Nikkei share averagehitting a 53-month high on Monday. A broad market rally began in mid-November after the calling of an early election that put Prime Minister Shinzo Abe in power a month later. Abe has promised aggressive monetary and fiscal policies to tackle prolonged deflation.
Prior to the stake sale, Japan Tobacco, whose cigarette brands include Winston, Camel, Benson & Hedges and Mild Seven, will buy back as much as 250 billion yen ($2.7 billion) worth of its own shares, Monday's filing showed.
Shares in Japan Tobacco have outperformed rival Philip Morris International Incand British American Tobacco Plcsince the bill approving the sell-down was approved in 2011, Thomson Reuters data shows, with investors welcoming reduced state control. http://r.reuters.com/guz26t
"We see ample room for JT to increase their share buybacks and dividends going forward as they have no net debt," Oscar Veldhuijzen, a London-based fund manager with The Children's Investment Fund Management (UK) LLP and a holder of Japan Tobacco stock, said before Monday's filing. "JT has the best growth prospects amongst the three major tobacco companies, as two-thirds of their profits come from Japan and Russia, where tobacco prices remain far below other countries on a PPP (purchasing price parity) basis."
Debt holders are also optimistic about the firm's ability to generate free cashflow after the share buy back is completed. Yields on its 2014 eurobond have tumbled 18 basis points this month and are currently at 0.60 percent.
Shares in Japan Tobacco closed on Monday at 2,901 yen, up 1.4 percent on the day. At that price, the share sale would be valued at about 967 billion yen.
Japanese law requires the government to hold at least one-third of Japan Tobacco's 2 billion shares outstanding.
Japan's large and liquid stock market is used to digesting big offerings, such as the $8.5 billion IPO of Japan Airlines Co Ltdin September and a $2.3 billion follow-on deal by All Nippon Airways Co .
Last month, U.S. private equity firm Cerberus Capital Management LPraised about $1.7 billion by selling shares in Japan's Aozora Bank Ltd .
Overall, equity issuance in Japan rose 16.8 percent last year to $26.4 billion, driven by large IPOs and a flurry of activity that made 2012 the busiest year for deals since 2008, Thomson Reuters data showed.
The ministry last June selected JPMorgan Chase & Co , Daiwa Securities Group Inc , Goldman Sachs Group Incand Mizuho Securities as underwriters for the Japan Tobacco offering.
Nomura Holdings Incwas not selected as an underwriter after its involvement in an insider trading scandal. But a source familiar with the details said on Monday that Japan's largest investment bank had been given a lesser role in the sale, along with SMBC Nikko Securities, Mitsubishi UFJ Morgan Stanley Securities, Merrill Lynch and UBS AG .
Japan also plans to sell shares of Japan Post Holdings Co, which runs the nation's biggest savings institution, to raise money for post-quake reconstruction.
($1 = 93.2200 Japanese yen)
(Additional reporting by Umesh Desai in Hong Kong; Writing by Junko Fujita and Alex Richardson; Editing by Ian Geoghegan)