BAT shares soar as City toasts Rothmans merger

SHARES IN British American Tobacco soared by more than 15 per cent yesterday as the stock market welcomed the group's surprise pounds 13bn merger with Rothmans International.

The shares rose by 84p to 625p, while shares in Imperial Tobacco also rose as analysts predicted that the deal would spark a wave of consolidation in the industry.

Analysts praised the logic of the deal which brings together the second and fourth largest tobacco companies in the world. The combined group, which will be known as BAT, will have a global market share of 16 per cent, within touching distance of arch-rival Philip Morris, which produces the Marlboro brand.

The deal assembles a powerful portfolio of cigarette brands. BAT makes State Express 555, Lucky Strike, Kent and Players as well as Benson & Hedges outside the UK. Rothmans makes Dunhill, Peter Stuyvesant and Winfield, as well as the Rothmans brand.

BAT said the two companies are a good geographic and cultural fit with Rothmans enlarging BAT's exposure to the higher-margin premium cigarette sector. "It has always been an element of our strategy to be number one. This deal takes us close, with leading positions in many markets," said Ralph Edmondson, BAT director.

The City sees costs savings as the key benefit of the deal. BAT anticipates pounds 250m of annual savings at a one-off cost of pounds 400m. This will lead to job losses but the group declined to specify how many or where they will fall.

In the UK Rothmans employs around 1,200 people in the North-east, split evenly between Darlington and Tony Blair's constituency of Spenneymore. BAT employs over 1,000 in Southampton and about 50 in Corby, Northamptonshire.

Jonathan Fell, tobacco analyst at Merrill Lynch, said: "It gives BAT critical mass in a number of markets as well as offering scope for cost savings. It seems like an obvious deal."

Justin Urquart-Stewart of Barclays Stockbrokers added: "There is very little duplication.These are cash-cow businesses and if you can cut out costs, particularly in their growth areas, particularly in the Third World, it's a wholly logical move."

The deal is being effected via the issue to Rothmans shareholders of 604.3 million ordinary BAT shares and 241.7 million preference shares which can be redeemed for a premium later.

Rothmans is owned by the Richemont and Rembrandt luxury goods companies, which are controlled by the South African Rupert family.

They will emerge with 35 per cent of the enlarged BAT group, although there is a standstill agreement under which they will only have 25 per cent of the voting rights. The remaining 10 per cent will be held though non-voting preference shares.

Richemont includes the luxury brands Cartier, Mont-Blanc and Dunhill which are held though its wholly owned subsidiary Vendome.

BAT expects the deal to receive regulatory approval even though the combined group will have more than 90 per cent of the South African market, over 80 per cent in Canada and just over 60 per cent in Australia.

Martin Broughton will be chairman of the enlarged group with Rothmans' chief executive Bill Ryan becoming deputy managing director.

Rothmans recorded operating profits of pounds 821m on net sales of pounds 3.2bn last year.

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