Tobacco deal in US may speed BAT into demerger

The demerger of BAT's financial services business from the tobacco side now looks more likely following the $368bn (pounds 221bn) settlement of US tobacco litigation announced last Friday.

Analysts said that if the legislation was approved by US Congress in its current form, pressure on BAT to demerge would grow, although Martin Broughton, BAT's chairman, said that the settlement had "no impact" on the company's thinking on the demerger issue. "If we wanted to demerge we could do it now," he added.

Paul Hodges, tobacco analyst at Schroders, said: "The threat of legal challenge would have made it very hard for BAT to demerge the financial side. Healthcare lobbyists would have said they were trying to protect their assets. Settlement must make demerger more of a reality." Another analyst said that a settlement would leave BAT freer to concentrate on an acquisition in financial services side, which would almost certainly trigger a demerger.

The comments accompanied strong denials by the industry and analysts that there would be a similar wave of litigation in the UK as in the US. Shares in UK tobacco companies took a drubbing yesterday over fears of a spread of litigation. Martyn Day, the solicitor organising a pounds 5m test case by 47 lung cancer victims against Gallaher and Imperial Tobacco - which sell 80 per cent of the 80 billion cigarettes sold in the UK each year - said: "I expect to see cases cropping up all across Europe." Mr Day who will try to persuade a judge to take on the case on 1 July said. "If we win the generic argument that tobacco companies failed in their duty of care to make cigarettes safe, then the whole litigation market here will open up." BAT's shares closed 21.5p down at 567.5p, Gallaher fell 18p to 282p while Imperial finished 13.5p lower at 407p.

However, analysts said there were important differences between the UK and US situations.

Nyren Scott Malden, of brokers BZW said that UK taxes on tobacco companies were considerably higher than in the US, where the excise duty was one of the lowest in the world: "UK companies pay pounds 10.5bn to the exchequer in cigarette taxes compared to pounds 8.5bn in the US, where the market is six times bigger." Jonathan Fell, tobacco analyst at Merrill Lynch pointed out that at the same time as lower tobacco taxes, annual smoking-related healthcare costs in the US were a staggering $50bn a year, dwarfing the UK's pounds 750m bill. "Tax revenues from tobacco pays for a decent size chunk of all the UK's healthcare needs, whereas they don't even cover smoking related costs in the US. Anti-tobacco groups here are bound to try and use this settlement to get public support, but it is hard to see how the argument would work."

Nick Butler, tobacco expert at stockbrokers James Capel said that there was much less incentive to litigate in the UK. Unlike in the US, solicitors here are not entitled to what can be a lucrative share of damages. Moreover, litigants suing in the UK are liable to pay compensation to tobacco companies if they lose and cannot sue for punitive damages, which again can be substantial. Instead they are limited to claims against personal injury or economic loss.