Lawsuit fears bash BAT

BLUECHIIP

BAT Industries was the victim of renewed concerns over United States tobacco litigation on Friday, with the shares sliding 14p to 540.5p. BAT shares had been on the up over the last 10 days, since the company announced it was contemplating some form of compensation package in the US for victims of smoking.

The shares have been pretty unappealing since tobacco litigation fears reached a peak last July. But despite the poor performance, on a longer term view BAT has been an excellent investment, having performed in line with the FTSE over the past five years. If tobacco was harmless, who knows where the shares might have reached?

And there is even grounds for optimism in the latest development. If BAT is able to reach some sort of settlement, it should be able to cap any potential liability - at least in the United States. After all, it is generally accepted that smokers, at least from the late 1970s onwards, have been aware of the health warnings.

The reason for its share price slide on Friday was that the Mississippi Supreme Court gave the go-ahead for the state to proceed with a suit to recover money from tobacco companies for the costs of Medicaid for treating smoking-related illnesses.

If BAT reaches some agreement in the US, it may have implications for other regions. As one brochure proudly proclaims: "BAT cigarettes are available in almost every country in the world and are manufactured in over 50 countries." In the UK, there are a few cases winding their way through the courts. Settlements in the US might turn those from a trickle into a flood.

Analysts believe a cap on tobacco litigation would make the shares worth 700p. Chief executive, Martin Broughton, has said a deal could come within 18 months. However, these assumptions may be optimistic.

The company has said it is examining its structure. That could mean a sell-off, perhaps of Farmers, its big US insurance operation, or wholesale demerger of its financial services arm. Or it could mean a partial demerger, with a link up with one of the big composite insurers. Either way, that should be enough to stimulate a re-rating of the shares.

With underlying profit growth in tobacco and financial services sluggish, and the large unknowns which plague the shares, they are best avoided for the time being.

RICHARD PHILLIPS