BAT buys out ST to secure lion's share of Scandinavian market

British American Tobacco yesterday announced its second major acquisition in the space of a week, buying out the cigarettes units of the Danish company Skandinavisk Tobakskompagni (ST) in a deal that values the business at a little over £2bn.

The cigarettes giant, which already owns around one-third of ST, said that while tobacco sales in Scandinavia were declining by 2 per cent a year, in line with other Western European markets, the business was particularly profitable, with high margins.

BAT will pay £1.15bn in cash for the chunk of the ST business it doesn't currently own, in order to take control of a company that has a 60 per cent share of the Scandinavian market. ST, whose best-known brand is Prince, also has a strong presence in Poland.

The deal will deliver the company around 30 billion cigarettes a year in extra production and also gives BAT ownership of Fiedler & Lundgren, the manufacturer of snus, the smokeless powdered tobacco. Snus is consumed by placing it between the upper lip and gums, rather than being smoked.

Paul Adams, BAT's chief executive, said: "We are buying a good business, with the ability to improve it, the ability to add scale and to use it as a platform for our premium brands."

Bruce Davidson, an analyst at Blue Oar Securities, said the deal would give BAT "a leading and profitable market share in Scandinavia", adding, "Snus is a useful by-product of the deal".

Tina Cook, an analyst at Charles Stanley added: "This is another good acquisition for BAT – smokeless tobacco products such as snus continue to be popular in Sweden and are gaining ground on the back of tighter smoking restrictions across Scandinavia."

BAT's purchase of the ST business follows its successful bid last week for Tekel, the Turkish state tobacco group heading for privatisation. It is to pay $1.72bn (£860m) for Tekel, giving it a strong presence in a country where 60 per cent of men smoke.

Yesterday's acquisition was announced alongside BAT's latest annual results, which revealed a 12 per cent increase in profits to £2.13bn on sales that were up by 2.6 per cent. The growth was achieved thanks to stronger sales in emerging markets, from where BAT now derives almost half its profits.

BAT said a strong focus on cost-cutting would enable it to improve margins – it believes it can make annual savings of £800m by 2012, having already saved £1bn over the past five years.