The Investment Column: BAT's Canadian deal fails to light up share price

NO ONE could accuse British American Tobacco of sitting on its hands on the dealmaking front. Just a couple of months after completing the Rothmans International takeover, it has smoked out another opportunity in Canada. The tidying up of the stake in Imasco sees BAT jettison its last financial services interests whilst giving it sole control of Imperial Tobacco in Canada. This deal in turn is expected to lead to the disposal of its Rothmans business in Canada, probably to Marlboro maker Philip Morris.

The deal was welcomed by analysts as it allows BAT access to Imasco's pounds 100m cashflow rather than just being able to consolidate the dividend payment. There should be further proceeds when BAT sells the remaining Imasco interests in retailing and property.

The deal aside, BAT's first-half figures would be enough to make any investor reach for a gasper. Operating profits edged up by 2 per cent to pounds 736m but were down by 9 per cent on an underlying basis. Volumes fell by 9 per cent in the first half, which includes a 12 per cent drop in the second quarter. Volumes have been hit by a price hike in the US to fund the Medicaid settlement. Elsewhere volumes have tumbled due to an export tax in Brazil and weak exports in Asia. BAT is expecting year on year improvements in the second half though the 29 per cent slump in volumes in the second half in Asia Pacific looks worrying. The drift in sales towards counterfeit sources is also a trend that could prove a longer term drain on the legitimate cigarette makers. But BAT is banking on a bounce back in Asia, eastern Europe and Latin America.

On the litigation front the record has been mixed with investor sentiment knocked by the class action in the US combined with aggressive noises being made by Al Gore in the presidential election race.

Much of this bad news is already in the share price which after an 18.5p drop to 516.5p yesterday is well off its highs of last year. Assuming profits of pounds 2bn in the year to 2000 the shares trade on a forward p/e of just 10. That may look cheap but BAT will need better news on trading before the shares light up. Hold.

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