Gallaher to be spun off from American Brands

Britain's leading tobacco company, Gallaher, the maker of the popular Benson and Hedges and Silk Cut cigarette brands, is to be spun off from its US parent, American Brands.

The manoeuvre, under which London-based Gallaher will make a $1.4bn (pounds 896m) payment to American Brands, is a direct result of the darkening environment for tobacco companies in the US, where the industry is facing multiple legal challenges and new regulatory difficulties.

By shedding Gallaher, American Brands will finally cut all of its links with the tobacco industry. The company sold all its US-based tobacco interests, the American Tobacco Company, in 1994 for $1bn. Under this transaction it will also rename itself Fortune Brands.

News of the deal led to an immediate 10 per cent gain in the stock price of American Brands in early New York trading yesterday. Officials said that it would get the company out from the shadow of tobacco litigation in the US. By decoupling from American, the effect should be the same for Gallaher in the US although the company may soon face the first group action in by smokers in the UK.

Gallaher's shares will be listed on the London Stock Exchange as well as on the New York Stock Exchange in the form of American Depository Notes.

"The spin-off will allow the managements of the two companies to focus exclusively on strategies and objectives geared to the very different financial, investment and operating characteristics and growth potential of their companies," Thomas Hays, American Brands' chairman said.

Gallaher, whose shares will be offered under the deal to current American Brands shareholders, is the number one seller of cigarettes in Britain and has a strong European presence. Gallaher's sales in the 12 months to June of this year topped $6.5bn. Officials said Gallaher would need to borrow the $1.4 bn to pay off American Brands.

The announcement may direct attention once more on RJR Nabisco, which has repeatedly come under pressure from some shareholders to separate its food division from its tobacco units, because of the depressive impact of the tobacco litigation on RJR stock. The company has so far resisted, however, citing uncertainty over the litigation and legislative processes as reason for caution.

The American-Gallaher spin-off is scheduled for completion within about 10 months. It may be complicated, however, by tax matters which, because of the international nature of the transaction, risk becoming unusually tangled.

Mr Hays added: "We believe that by creating two financially strong, publicly traded companies, each of which will be solidly positioned for profitable growth, we will enhance the prospects for both operations and increase shareholder value."

American Brands added in a statement: "Since Gallaher will be recognised more clearly as a UK/European tobacco manufacturer operating in an environment significantly different from the current US tobacco litigation and regulatory environment, the value inherent in that operation should be more apparent."