Gallaher could light up

Next Friday another (and very probably the last) UK-based tobacco company will list its shares in London.

Gallaher enjoys a 39.1 per cent market share in the UK, marginally ahead of Imperial. Its premium collection of brands - Benson & Hedges, Silk Cut and Old Holborn rolling tobacco - have a potent hold on smokers' palates.

Curiously, though, one of the major influences on the share price will have little to do with the relative attractions of smoking. The offshoot of its parent, American Brands, Gallaher will be in the unusual situation of seeing 99 per cent of its shares held in the US, while the business is centred on the UK.

There is an argument that shares will flow back to the UK: the company, with an expected price range of 310p to 320p, will be worth about pounds 2.2bn - on the cusp of FT-SE 100 membership.

Demand from index tracking funds will see investors queuing up to buy the shares, it has been said - but where are the shares to come from? Almost half of American Brands is held by US retail investors - traditional inertia may see little in the way of selling for the short term.

More pressing for investors over here was Labour's announcement of a ban on tobacco advertising and sponsorship.

Investors would be right to be wary. Of the 45 billion sticks - the tag used by the industry to describe its main product - Gallaher sold worldwide last year, 32 billion were in the UK, a market which has been in gentle decline for years. And it has suffered depredations to its upmarket brands from cheaper substitutes, such as Lambert & Butler.

The arguments are complicated, however. Last week, the directors spent much time persuading UK investors of its merits. They say a ban may well enhance its premium brand market share. The reasoning is that brand awareness at this level is such that smokers will drift to the higher profile brands over time.

Either way, the arguments are finely poised. But Gallaher represents a golden opportunity to buy into some of the most high profile consumer brands in the UK. Outlawing the purple silk poster campaign may dent consumer awareness of Silk Cut, but the brand will remain a contender for some time yet.

Coupled with an attractive dividend policy, the shares are a buy, but should not be chased.