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The Investment column: City warms to Imperial deal

IMPERIAL TOBACCO is enjoying its new found freedom after demerging from Hanson. Last year it bought Rizla, the world's leading cigarette paper maker for pounds 185m.

Yesterday the group continued its acquisition spree by announcing a pounds 362m purchase of Douwe Egberts' tobacco business, which will give it a dominant position in the hand rolling and pipe tobacco market.

The deal certainly makes sense. With Drum, Van Nelle and Amphora, Douwe has some of the best tobacco brands in the world.

Imperial is one of the most efficient tobacco groups in the business and it should be able to bring the 37 per cent margins the new business earns closer to the 50 per cent enjoyed at its existing tobacco operations.

Imperial also gets instant access to the continental European tobacco market. It should be able to produce significant growth in revenues by using Douwe's existing distribution network to increase international sales.

Overseas expansion is the key to future growth for the industry, given that the mature UK market is likely to continue its gradual decline.

The City warmed to the deal and Imperial's shares jumped 31p to 458p yesterday. The acquisition will have little effect on profits for the year to September as it will not be completed until the summer.

The real benefits will be seen in 1999, where analysts have upgraded earnings per share forecasts by 6-7 per cent, putting Imperial on a prospective p/e ratio of under 9.

Even though fears of tobacco litigation and a Government crackdown on smoking will continue to dog the shares, Imperial looks good value.