pounds 500m windfall for BAT investors in Zurich merger

BAT Industries yesterday unveiled a pounds 500m windfall for its shareholders from the planned merger of its financial services arm with Zurich Insurance of Switzerland, but warned investors they face a dividend cut next year. Lea Paterson reports on the break-up of another British conglomerate.

BAT Industries, the tobacco and financial services group which yesterday announced the appointment of former chancellor Kenneth Clarke as non-executive deputy chairman, will receive a pounds 500m net cash payment from Zurich Insurance, the Swiss company which is merging with its financial services arm, BAFS.

BAFS owns UK insurers Eagle Star and Allied Dunbar, which yesterday lost its chief executive Steve Melcher in an "unrelated" departure. Allied also announced a further pounds 78m provision in its third-quarter results to cover its liabilities in the pensions mis-selling scandal.

Following the merger with Zurich, BAT's tobacco arm will float separately as British American Tobacco, headed by current chief executive Martin Broughton, taking the UK quoted tobacco sector to three. An imminent deal between BAT and either Gallaher or Imperial is expected by some analysts.

Zurich will also take on pounds 800m, or around 20 per cent, of BAT's debt, the companies said in a joint statement yesterday. The new insurance giant, which will boast $342m of funds under management, is to be called Zurich Financial Services Group (ZF Group) and will be managed by Rolf Huppi, the head of Zurich Insurance.

BAT shares will be replaced by shares in both British American Tobacco, and Allied Zurich plc, which will hold 45 per cent of the ZF Group. Zurich Insurance shareholders will own shares in Zurich Allied AG, which will hold the remaining 55 per cent of the ZF Group.

"This is very good for BAT and an excellent deal for Zurich shareholders," said Trevor Moss, BAT analyst at Flemings, yesterday. BAT's share price rose immediately after the announcement, peaking at 619p. It closed at 596.5p, 4.5p down on the day as investors focused on comments from Lord Cairns, seen as preparing shareholders for a dividend cut.

BAT's 1996 dividend of 26p would have been around 20 per cent lower under the proposed payout policies of ZF Group and British American Tobacco, the companies said.

The board of the ZF Group will be drawn from the boards of Allied Zurich plc and Zurich Allied AG. Mr Huppi will chair both the board of the ZF Group and the board of Zurich Allied AG. Lord Cairns, currently BAT's chairman, will act as vice-chairman on ZF Group's board, vice-chairman of the board of Zurich Allied AG and chairman of the board of Allied Zurich plc. Mr Huppi will be vice-chairman of Allied Zurich plc.

The newly formed British American Tobacco has a bright future, according to analysts. "There will be increased transparency for investors", said Mr Moss, who reckons this should buoy up the tobacco's company value. BAT is also well positioned in high growth markets such as Africa, the Middle East and Latin America.

On the financial services side, Zurich will be able to piggyback on the distribution network of Farmers, BAT's US insurer. Other areas of overlap include general insurance and reinsurance.

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