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Gallaher muscles in on Seita's alliance

GALLAHER GROUP, the tobacco company that produces the Silk Cut and Benson & Hedges cigarette brands, was moving last night to uproot an agreed linkup between Spanish rival Tabacalera and France's Seita, by making an alternative friendly merger offer to the French company.

A source close to Gallaher confirmed that it had approached Seita with an opening offer of 75 euros per share as a basis for detailed talks. This would value the maker of Gauloises and Gitanes cigarettes at 3.9bn euros (pounds 2.48bn).

This would outgun the stock and cash deal for Seita that was agreed at 3.09bn euros, or 59.28 euros per share, last month. Gallaher's proposal could see the companies merge, although it is unclear how management positions would be split in a combined group or how much cash would be involved.

Seita stock was suspended on the Paris bourse yesterday after rising 13.8 per cent to 58 euros. Gallaher closed down 2p at 368p. Should Gallaher, which has a market capitalisation of pounds 2.2bn, press ahead with a formal deal proposal, it would upset the French and Spanish governments; both have backed the link-up. Seita and Tabacalera have long operated as state- owned monopolies, but have been increasingly privatised in recent years.

Although Paris and Madrid as well as the companies' managements are anxious for the Franco-Iberian deal to proceed, analysts said that market sentiment has not been as favourable. The French government retains a 3 per cent stake in Seita, which is considered ripe for major cost cutting. The Spanish government holds a substantial controlling interest in Tabacalera.

Gallaher, which was demerged in 1997 from American Brands, is judged to be anxious to strike a deal. "Gallaher is very exposed to the UK market, which is declining very quickly," said an analyst. "A deal would also provide defence from a possible hostile take-over."

The proposed Seita-Tabacalera merger or an alternative deal with Gallaher would create the world's fifth biggest tobacco group after Philip Morris, British American Tobacco, Japan Tobacco and China's state-owned tobacco industry.