Japan Tobacco buys Gallaher for £7.5bn

Japan Tobacco, the world's third biggest cigarette company, is buying Britain's Gallaher Group for £7.5bn cash, in a move that is expected to spark a round of consolidation in the tobacco sector.

The deal gives the maker of Mild Seven brand cigarettes a bigger stake in the Western European market. The deal would reportedly be the biggest Japanese overseas acquisition.

The move comes as Japan Tobacco, already the overseas distributor for Winston, Camel and Salem cigarettes, tries to bolster earnings by expanding outside Japan, which has seen declining smoking rates. Japan Tobacco has also been looking to diversify outside cigarettes.

The deal would take JT into a Western Europe market where it has little presence. JT has operations in Russia but its bid for Turkey's state-run Tekel tobacco company was rejected last year. "The integration of our business operations and our portfolios will position our international tobacco business for continued growth," JT president and chief executive Hiroshi Kimura said.

Tokyo-based JT is offering £11.40 for each outstanding share of its British rival. This represents a 16 per cent premium to the 979p its shares were trading at the day before Gallaher announced it had received a bid approach on 6 December. Shares in Gallaher closed at £11.55 on Thursday, giving the tobacco group a market capitalisation of £7.6bn.

Merrill Lynch is to help finance the acquisition by extending a loan. Gallaher has agreed to pay Japan Tobacco a break fee of £52m if it goes on to accept a rival approach. The combined company would have annual global output of 600 billion cigarettes, JT said. It would remain at No3 behind Altria Group of the US and British American Tobacco.