Upbeat Imperial says it has the firepower for a major acquisition

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The Independent Online

Imperial Tobacco said yesterday it was keen to make a major acquisition as it unveiled a 13 per cent rise in first-half profits.

The world's fourth-largest tobacco group refused, however, to comment on growing speculation that it could pounce on its Franco-Spanish rival Altadis.

Gareth Davis, the chief executive, said the group had considerable headroom for acquisitions and added: "We would hope somewhere along the line to make a significant acquisition, but we're not entirely the masters of our own destiny." He denied the company was under pressure from its shareholders to make a deal.

Over the past 16 months the maker of Embassy and Lambert & Butler has been linked with a £9bn bid including debt for Altadis, the world's sixth-biggest cigarette firm whose brands include Gauloises and Fortuna. Imperial has recently struck distribution deals with Altadis in Russia and the Netherlands.

Imperial has suffered tough trading in its core markets of Britain and Germany as higher taxes on tobacco took their toll, but saw good volume growth in Asia and Eastern Europe. Overall cigarette volumes rose 9 per cent, propelling pre-tax profits to £547m for the half year to 31 March, ahead of City expectations.

However, the UK market is declining by about 4 per cent a year, with fewer than 50 billion cigarettes being smoked. A further threat comes from public smoking bans: in Scotland, a ban in pubs and restaurants took effect on 26 March and is set to be extended to England next year.

Mr Davis sought to shrug off the impact by saying the lesson from Ireland, where a ban was introduced two years ago, was that after a dip in cigarette consumption it would recover gradually over 12 to 18 months. He said the Irish market was up 4 per cent again this year and that 29 per cent of the Irish adult population were still smoking, the same proportion as before the ban.

Public smoking restrictions are spreading across Europe but Mr Davis appeared unconcerned. He said he preferred voluntary measures to legislated outright bans, such as in Germany, where half of the seating in 90 per cent of bars and restaurants will be non-smoking by March 2008 under a voluntary industry agreement.

Although cigarette volumes were under pressure in the UK and Germany, Imperial increased its market share in both countries, helped by the launch of Windsor Blue in Britain. Drum tobacco also performed well.

The group sees room for expansion in other Western European countries where its share is only in single digits. Likewise in Russia, where its share is just 5.5 per cent.