Seita, Tabacalera discuss tobacco link-up (fwd)

[Robert Weissman <rob@essential.org>]

FOCUS-Seita, Tabacalera discuss tobacco link-up
by Caroline Brothers
Source: Reuters, Monday, 10/4/99

Monday October 4, 9:53 am Eastern Time

PARIS, Oct 4 (Reuters) - French cigarette group Seita and Spanish
counterpart Tabacalera said on Monday they were discussing an alliance
that would form the world's fourth biggest tobacco group if it led to a
full merger.

It was unclear exactly what kind of partnership was in the works, but
analysts said a merger looked likely amidst rapid consolidation in the
shrinking world tobacco market.

``It looks like it's serious this time,'' said Carlos Ramos, analyst at
Ahorro Corporacion Financiera in Madrid.

Seita , whose shares were suspended limit-up on Friday amid merger
rumours, said on Monday it was in talks with Tabacalera, but several
issues remained to be resolved. Its reference to a ``new group''
encouraged merger expectations.

Tabacalera said talks were at an advanced stage and the two groups were
looking at shareholder structure issues.

``Both Seita and Tabacalera have thought that a European tobacco champion
might need to be created,'' said Andrew Darke, tobacco industry analysts
at Williams de Broe in London.

If the two formerly state-owned groups were to combine, analysts said they
would leap from 10th and 11th place to fourth in the world, excluding
China's state-owned tobacco monopoly.

NEW GROUP WOULD RANK FOURTH

With combined market capitalisation of about 6.7 billion euros ($7.2
billion), the combined group would come far behind industry giants Phillip
Morris (NYSE:MO - news), British American Tobacco (quote from Yahoo! UK &
Ireland: BATS.L) and Japan Tobacco .

``A merger between the two would give them greater weight in tobacco
purchasing, greater weight in terms of financing possibilities,'' said
Annie Bonal, sector analyst at Credit Lyonnais European Securities.

Seita shares were up 2.52 percent by 1016 GMT on Monday after an opening
delayed by the two companies' statements, compared to a 0.71 percent gain
in the CAC-40 blue-chip index.

Tabacalera shares, also suspended at the start of trading, were up 0.44
percent at 19.50 euros.

While some analysts questioned the industrial logic of a merger, others
said continental European companies could otherwise find themselves
marginalised by larger competitors.

``They are taking a long-term view, looking beyond the 1999-2001 period in
which their results will pose no problem, but after which competition and
their financial power for acquisitions will be more and more restricted,''
Bonal said.

``Obviously it is the big groups that have the hitting power and which
threaten to take away (their future market).''

Ramos said he saw cost savings for both companies. They could manufacture
cigarettes wherever it was cheapest, were of similar size, and competed
only in the U.S. cigar market.

PURCHASES POSSIBLE IN EASTERN EUROPE

``It's good news that will allow Seita to have a stronger financial
capacity to sustain its development internationally,'' one French analyst
said. ``It could allow them to buy more groups, particularly in eastern
Europe.''

Cost savings would probably have to be achieved, however, through plant
closings that could pose problems. ``They've got to look at the
manufacturing cost basis, which is political dynamite in both cases,''
said Darke at William de Broe.

Seita, maker of Gauloise and Gitane cigarettes, was privatised in 1995.
The state did not retain a golden share and Finance Minister Dominique
Strauss-Kahn noted on Monday that any tobacco merger would be between two
private companies.

The Spanish government has a say in important developments in Tabacalera
via its golden share, but Madrid analysts do not believe it would block
such a move.

Seita union officials said management had called a meeting with staff for
5 pm (1500 GMT).

Seita, which is ambitious to expand abroad, has had success recently with
its mild Gauloise Blondes whose popularity is increasing in Germany,
Austria and Greece as well as France. It had sales of 1.6 billion euros in
the first half of 1999.

Tabacalera, which makes Fortuna and Ducados cigarettes, had sales of 566
billion pesetas ($3.66 billion) in the first half.

($1=154.60 Spanish Peseta)

($1=.9321 Euro)