Anti-trust issues fail to dent confidence in tobacco deal

Investors rushed to re-rate shares in British American Tobacco following its decision to combine its United States arm with rival RJ Reynolds, ignoring the potential anti-trust hurdles that the $6.2bn (£3.7bn) deal poses.

BAT shares surged 12 per cent despite weaker quarterly results that drew attention to problems the group's Brown & Williamson subsidiary is facing in America.

The company hopes the tough US trading environment, which was highlighted by RJR's $3.45bn third-quarter loss, will prompt the Federal Trade Commission (FTC) to take a lenient view of the duopoly that will exist with the creation of Reynolds American.

RJR shareholders also welcomed the deal, focusing on the scale that the effective takeover of B&W will provide and the $500m cost savings rather than the deal's full price. Shares in the US company leapt 12 per cent in early trade.

Martin Broughton, the chairman of BAT, admitted getting anti-trust clearance was "an issue", but he added: "Far from [the deal] being anti-competitive, which it could look at first sight with two companies joining to have a 30 per cent market share, it is actually pro competitive."

Both companies have "been squeezed" between the 50-per cent share held by Altria, the maker of Marlboro, and some 50 smaller competitors that have burst on to the market since a landmark legal settlement in 1998 penalised existing tobacco companies, he said.

But analysts were less confident. Michael Smith, at JP Morgan, said that in 1994 the FTC initially blocked BAT's acquisition of American Brands, taking umbrage at the enlarged group's potential 17 per cent market share. "If you have the top two companies with an 83 per cent market share they [the authorities] will take a tough line," another analyst added. This could force Reynolds American to sell off some of its new portfolio, which will include brands ranging from Camel and Salem to Kool and Lucky Strike, analysts warned.

Although half the group's shareholders were initially uneasy about any deal involving RJR, yesterday they welcomed the move that will see the US company indemnify B&W for all existing and future US tobacco litigation. "No one is going to be unhappy with this deal," one top-10 shareholder said. "It's an ideal scenario. It should add another £1 to BAT's share price as its shares move back to a similar rating to Imperial Tobacco and Gallaher."

Mr Broughton hinted that the group's future attention would focus on Europe. This prompted shares in Gallaher, perennially tipped as a BAT target, to rise 26p to 596p.

BAT yesterday reported a 20 per cent drop in nine-month pre-tax profit to £1.3bn, citing weak revenue growth and restructuring costs. It said B&W's cigarette volumes slid 7 per cent during the period, while the division's profit contribution fell 26 per cent to £194m. RJR's third-quarter net sales fell 13 per cent to $1.38bn on lower volume.