BAT hit for pounds 160m to cover pollution claims

BAT stunned the City yesterday with an unexpected pounds 160m provision against the future cost of long-running pollution claims, the extension of an olive branch to the anti-smoking lobby and a renewal of hopes that the tobacco to financial services group was planning a demerger of its two main businesses. The shares, a hostage to sentiment for much of the past year, tumbled another 18.5p to close at 531p yesterday.

In a dramatic climbdown from the adversarial rhetoric that has dogged recent tobacco-related litigation in the US, BAT said yesterday it would be prepared to strike a deal with lawyers representing former smokers if they came up with a "sensible proposal".

The move opens the way for a multi-billion-pound settlement that would have been inconceivable until an onslaught of litigation in the past year made the tobacco companies' hawkish position on compensation increasingly untenable.

Martin Broughton, chief executive, blamed the spiralling cost of fighting court cases and the impact of the escalating litigation on BAT's share price for the apparent capitulation. He said BAT's US tobacco subsidiary, Brown & Williamson, spent $100m (pounds 62m) on legal fees last year, up from $60m in 1995, and he expected the figure to continue rising.

News of BAT's new-found willingness to accommodate its opponents came as it announced a sharp slowdown in profits growth last year, with the group's Eagle Star to Allied Dunbar financial services arm hit by an unexpected pounds 160m extra provision to cover the likely cost of old pollution cases. BAT capped the day's revelations with a hint that a demerger of its tobacco and financial services operations was firmly back on the agenda in the group's attempt to return to a growth tack in shareholder value.

Mr Broughton said BAT had hired two firms of lawyers in the US to advise it on the process of getting congressional approval for any settlement. But he insisted a deal would only be acceptable if it drew a line under all present and future litigation. He said the sort of numbers flying around the press - some reports have suggested plaintiffs are seeking a $6bn-a- year payment from the industry - were wide of the mark, but he admitted that paying up to $100m a year would leave shareholders better off.

BAT's shares closed lower as the market digested the unexpected pollution charge which reflected a change to the way Eagle Star assesses its likely liability in respect of pollution cases stretching back to the 1960s. Mr Broughton admitted it was not possible to say whether there would be further provisions.

He declined to comment on whether BAT had held discussions with Commercial Union on a possible merger of its financial services arm with CU or whether the putative deal would have been the prelude to a break up of its two main businesses.

BAT has been under pressure for some time to split its tobacco and insurance arms which have no apparent synergies.

Pre-tax profits in the year to December increased by 5 per cent to pounds 2.50bn from pounds 2.38bn in 1995, which compared with a 26 per cent rise in profits the previous year. Earnings per share rose an even more modest 2 per cent to 48.6p (47.7p) but the well-covered dividend increased 8 per cent to 26p. A foreign income dividend increased the effective value of the payout by 3.5p.

Within the group result, tobacco made further progress after its strong performance in 1995, with profits rising 7 per cent in local currency terms to pounds 1.63bn. Volumes increased by 4 per cent despite a continuing slowing of demand in the US and world market share increased to 12.8 per cent.

Financial services, which takes in the Farmers business in America, slipped 3 per cent to pounds 1.02bn but stripping out the pollution provision, there was an underlying 16 per cent increase in life and investment profits and a pounds 22m rise in general insurance profit to pounds 686m.