BAT sets agenda for growth in cigarette world

LONDON: British American Tobacco, the No. 2 cigarette company after Altria, is setting the agenda for growth in the cigarette world with modest acquisitions and deep cost cuts as the era of big tobacco deals comes to a close.

The maker of Kent, Dunhill and Lucky Strike cigarettes has announced two midsize deals in the past seven days and a five-year cost-cutting program.

The four biggest tobacco groups now control four-fifths of the global cigarette market excluding China, and any further consolidation among them looks distinctly unlikely for antitrust reasons, analysts say.

The top four - Altria, BAT, Japan Tobacco and Imperial Tobacco - will now look to internal growth, state privatizations and smaller deals in emerging markets to increase volumes, while lifting earnings through cost cuts and share buybacks.

"There are not the transformational deals out there - big transformation deals are gone," Paul Adams, chief executive of BAT, said Thursday. He added that his company could reach its financial goals through organic, or internally driven, growth.

Over the past 10 months, the fifth- and sixth-largest companies, Gallaher of Britain and the French-Spanish maker Altadis, were taken over by Japan Tobacco and Imperial Tobacco, respectively, in a last flurry of big deals.

BAT has had its share of transformational deals, taking over Rothmans in 1999. It then merged its U.S. arm with R.J. Reynolds to create Reynolds American in 2004, in which BAT has a 42 percent stake, to cut its exposure to U.S. litigation.

Analysts say the big four now are focused on state monopolies in Egypt and Algeria, if or when they come up for sale. Attention will also focus on Altria, which plans to spin off its business outside the United States, Philip Morris International, on March 28.

PMI will remain the largest cigarette company; it made 850 billion cigarettes in 2007. It will be a major player in Western Europe, with the top position in such large markets as France, Germany, Spain and Italy. The company has already indicated that it plans a share buyback program of $13 billion over two years and a dividend payout ratio of 65 percent of available earnings.

BAT started a £750 million, or $1.5 billion, share buyback in 2007, and it also plans to pay out 65 percent of earnings as dividends this year, reflecting the lack of big acquisition opportunities worldwide. The group temporarily scaled back its buyback program for 2008 to £400 million after its two latest acquisitions.

BAT agreed last Friday to pay $1.72 billion for Turkey's state-owned cigarette maker, Tekel. On Thursday, BAT agreed to buy the cigarette business of the privately owned Skandinavisk Tobakskompagni of Denmark in a deal worth £2 billion, giving BAT control of 60 percent of all cigarettes smoked in Scandinavia.

The two deals will added 32 billion and 30 billion annual cigarette sales, respectively, to BAT's 2007 sales of 684 billion and edge it closer to PMI. But more importantly, both will enhance earnings immediately, will lead to £90 million in cost savings and were struck at what Adams called reasonable prices.

BAT paid 11.4 times historic annual earnings for Tekel and 11.2 times for its Scandinavian deal, well below the 14.2 multiple Imperial paid for Altadis, the maker of Gauloises, in January, and the 13 multiple Japan Tobacco paid deal for Gallaher, which makes Benson & Hedges, in April.

BAT has cut its cost base by just over £1 billion in the five years through 2007 and plans to cut £800 million in the five years to 2012 as it seeks greater efficiencies at its 47 factories and among its 54,000 employees worldwide.

BAT reported a 12.3 percent increase in net profit last year as revenue rose 3 percent to £10.02 billion.

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