US price war fear hits market: BAT down again as analysts do their sums on Philip Morris offensive

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The Independent Online
THE LONDON stock market closed sharply lower yesterday following Wall Street's dramatic fall on Friday. Investors were worried that the decision by Philip Morris to slash the price of its Marlboro cigarettes in the US might tempt other American companies to start price wars.

The FT-SE index of 100 leading shares closed 31.1 points lower at 2,838.8, wiping nearly pounds 6bn off the value of the market. In contrast, Wall Street showed a small rise.

The European currency markets were quiet, although the Bank of Japan stepped in to buy dollars in Tokyo as the US currency hit a fresh low of Y113.3 against the dollar.

The markets were little moved by official UK credit business and money supply figures for February, which suggested that the revival in high street spending in recent months remained in place, although it may not yet be irreversible. People appeared to be rebuilding their reserves of cash, but still reluctant to borrow large sums to finance their spending.

Excluding mortgage borrowing, consumers took out a net pounds 49m of new debt from building societies, finance houses and on Visa and Mastercard credit cards in February. This was down from pounds 151m in the previous month and around half the figure expected by the City. The amount of consumer debt outstanding fell by pounds 19m in February to pounds 29.712bn, adjusted for normal seasonal changes. The Central Statistical Office projected that pounds 68m of bad consumer debts were revalued or written off in the month.

Bank of England figures confirmed that the narrow money supply measure M0 - cash and banks' balances at the Bank of England - rose by 4.9 per cent in the year to March, the sharpest rate of increase since the summer of 1990 and well above the Chancellor's 0-4 per cent 'monitoring range'. In the past three months M0, which is seen as a good indicator of consumer spending, has risen at an annual rate of 9.8 per cent.

The Bank also reported that overseas investors bought a net pounds 1.03bn of gilt-edged government securities in February, the most for 20 months, boding well for the Bank's efforts to finance the Government's pounds 50bn borrowing requirement this year.

The most obvious casualty of the Philip Morris move in London yesterday was BAT Industries, the third largest cigarette group in the US. Its shares fell by 42.5p to 885p following a 71p fall on Friday.

Warburg Securities estimated yesterday that a US price war could cost BAT pounds 200m this year and even more next year. Its analyst, Mark Duffy, said Philip Morris was fundamentally more profitable than Brown & Williamson, BAT's US subsidiary. Last year it made about dollars 24 per 1,000 cigarettes, three times as much as BAT.

He estimated that a price war would more than halve the profit per pack that B&W made on premium brands and would push its discounted brands - the sector of the market where B&W is strongest - into loss. Warburg has reduced its profit forecast for BAT this year to pounds 1.83bn.

In New York, shares in Philip Morris, down 23 per cent on Friday, regained 37.5 cents to dollars 50.

Shares in RJR Nabisco, seen as another casulaty in a price war, lost 25 cents to dollars 6.50.

(Graph omitted)