Thick-skinned BAT shrugs off another attack

British American Tobacco; Baltimore Tech; Old King Coal

Few industries get as bad a press as tobacco. Reviled as the Dr Deaths of the industrialised world for selling the cancer-causing weed, the tobacco giants rank about as low as you can go on any ethical investment chart. Throw in the on-going torrent of legal action from cancer sufferers, and even gun-running might be regarded as a quiet life set against what the tobacco executive has to put up with.

On top of all this, one of their number, British American Tobacco, has now been accused of smuggling on a grand scale. What is in essence an old story has only gained fresh legs because Kenneth Clarke, one of the contenders for the Tory Party leadership, happens to be non-executive deputy chairman of BAT. This is not the way it is meant to work, of course. Large companies take on former cabinet ministers not to attract attention to themselves, but to gain credibility and access.

The central accusation is that BAT not only turns a blind eye to smuggling but that it actively encourages and even orchestrates it. This is quite an allegation, as is the charge that a third of the group's £1.5bn profits come from smuggled goods. BAT profits not just from a controversial trade, but from an illegal one, too, is the central thrust of the charge.

The company denies this, of course, saying an old story is being warmed up to make life difficult for the cigar-chomping Mr Clarke. What it cannot deny, however, is that it is the subject of a DTI investigation launched last year into alleged involvement in tobacco smuggling. Only BAT was named in the investigation, which was initiated after a Health Select Committee report on the tobacco industry last October. This in itself was odd, since prior to the merger with Rothmans, BAT sold hardly any cigarettes in the UK.

BAT says it does not engage in smuggling and does not condone it either. Well, it would have to say that wouldn't it, but the fact of the matter is that the tobacco giants almost certainly do gain from smuggling even if they may not engage in it. The biggest UK tobacco sellers, Gallaher and Imperial, have always contended that cheap, smuggled cigarettes prevent people from smoking their own, duty-paid brands and undermine the investment made in legitimate channels of distribution. But the problem arises when the smugglers gain access to the brands duty free. The tobacco company gains because it is plainly possible to sell a lot more cigarettes free of duty than with duty paid.

The tobacco companies export billions of cigarettes to countries such as Cyprus where duty is low and UK brands are not particularly popular. The trade is justified by way of high levels of tourism, but the figures don't stack up. Each tourist would have to smoke several suitcase loads to exhaust the supply. The suspicion is that they are shipped straight out again and sold on the black market elsewhere.

It is hard to quantify the investment risks of all this, but plainly a business that relies to a large extent on an illegal trade, even though it doesn't condone that trade, is bound to be highly vulnerable to a crackdown.

Baltimore Tech

Paul Sanders ought to know a thing or two about basket cases. Up until last November, he was finance director of SSL International, the Durex manufacturer which has admitted to the discovery of a whole raft of false invoices and sales and now finds itself subject to investigation by just about every regulator in the land, including the Serious Fraud Office.

Fortunately for Mr Sanders, the balloon went up after he had left, but the task at his new berth as chief executive of Baltimore Technologies scarcely seems a more comfortable one. Baltimore yesterday confirmed that revenues for the fourth and first quarters had been overstated, took a massive £389m write-off of goodwill against recent acquisitions, announced it was getting rid of the bulk of its workforce, either through divestment or redundancy, delisted itself from Nasdaq and put one of its largest businesses up for sale. If Baltimore gets any more than a tenth of the £700m it paid for the business, it will be doing well. As kitchen sink clear-out exercises go, they don't come much more impressive than this one.

It seems scarcely believable now, but Baltimore Technologies was briefly a constituent of the FTSE 100 index. That few could figure out precisely what it was that Baltimore did, let alone who ran it, hardly seemed to matter. Was it the quietly spoken professor of mathematics, Henry Beker, with his algorithms and encryption codes, or was it the brash marketeer from Dublin, Fran Rooney? And what was it they were trying to sell anyway?

So long as the share price kept rising, nobody seemed to care. But then the music stopped, the technology bubble went pop, and it's been downhill ever since. Both Messrs Beker and Rooney are history, and so, pretty much, is the company as well. If it makes sales of £70m this year, it will be a miracle. Baltimore has had its 15 minutes of fame and it's now back in the small caps, struggling, like everyone else, to survive.

Mr Sander put forward a relatively credible strategy for achieving breakeven yesterday, but survival is still far from guaranteed. The future is bright, says Baltimore, citing IDC estimates that the market for internet security software will be worth $4bn annually by 2004, but you only have to look at the share price to see that no one believes this kind of long-term forecasting nonsense any longer.

The reality is that even before the internet lost its shine, the high priests of the New Economy were finding it tough to persuade businessmen and bankers that the Web was secure enough to allow full commitment to e-commerce. The technology meltdown has set the cause back years, if not decades. Meanwhile, all non-essential IT and software spending has been frozen throughout most organisations as the world economy slows. Hardly a happy backdrop to Baltimore's recovery plans.

Old King Coal

There's not much left of the former British Coal Board – just 7,500 miners and 13 deep mine pits – but still it manages to gobble up truck loads of state aid and cling to some truly antiquated working practices. Last November, the now privatised British coal industry got another £130m dollop of taxpayers money. Has this helped matters much? Not by the look of it.

According to the latest edition of UK Coal's house magazine, NewScene, the company is still struggling both to dig the stuff out of the ground at a profit and to meet domestic demand. In the first four months of this year, coal imports into the UK more than doubled, while production at UK Coal, the renamed RJB Mining, fell back sharply.

UK Coal's new chief executive, Gordon McPhie, has had the Bainies in and they've concluded that only a radical overhaul of working practices is capable of delivering the sharp reduction in production costs necessary to bring them into line with Australia and the US. The unions are already threatening to strike, but it doesn't look as though they've got much of a leg to stand on. The miners sill occupy a special position in Labour's folklore and history but, even for Labour, another bailout would be hard to justify when market forces are laying waste to so many other industries and jobs the length and breadth of the land.

j.warner@independent.co.uk