[Intl-tobacco] Austria Tabak Warns of Takeover If Govt Sells Stake (Update1) (fwd)

[Robert Weissman]

Austria Tabak Warns of Takeover If Govt Sells Stake (Update1)
by Gabrielle Monaghan
Source: Bloomberg News, Thursday, 2/24/00

Vienna, Feb. 24 (Bloomberg) -- Austria Tabakwerke AG, owner of the
nation's only tobacco store chain, said it will become a takeover target
unless the government keeps a blocking minority instead of selling its
remaining stake in the company as planned.

Chief Executive Heinz Schiendl said that an alliance with a rival might be
the only way to preserve independence in the face of the government's
planned sale of its 41.1 percent stake and as proposed cigarette tax
increases threaten its ability to compete.

     ``I don't know of any big tobacco concern that isn't interested in
buying Austria Tabak,'' Schiendl said. ``If the government decides it
wants Austria Tabak to be fully privatized, a takeover is a possibility.''

U.S. tobacco companies such as Philip Morris Cos. would be interested in
gaining access to a European market where they wouldn't face billions of
dollars in compensation to smokers, analysts said. Rival European
cigarette makers also have been looking for acquisitions, including
British American Tobacco Plc, Gallaher Group Plc, Imperial Tobacco Group
Plc and Altadis SA.

     ``Europe has a whole different culture to the U.S. as regards tobacco
industry lawsuits,'' said Jan Berger, who helps manage about 20 billion
schillings ($1.44 billion) at Constantia Privatbank AG.

Austria Tabak shares closed down 0.53 euro, or 1.2 percent, to 45.40 on
the Vienna Stock Exchange.

                         Preparing to Sell

     Austrian state-asset holding company, Oesterreichische
Industrieholding AG, said Feb. 8 it's preparing to sell the government's
remaining 41.1 percent of the former monopoly.

The Austrian government, which was sworn in Feb. 4 and includes the
far-right Freedom Party, could reduce its holding to just more than 25
percent as early as the end of 2000, Schiendl said. Austria Tabak would
like the government to hold onto that amount, which would be a blocking
minority, he said.

Schiendl also warned that higher cigarette taxes to be outlined in Finance
Minister Karl-Heinz Grasser's budget speech on March 21 would shave sales
at Austria Tabak in 2000 and 2001.

Grasser, a Freedom Party member, wants to reap an additional 87 million
euros for government spending with the higher taxes, which Schiendl said
would discourage smokers at home and make its products less competitive in
neighboring European Union countries such as Germany and Italy.

     ``Austrian cigarettes already cost between 5 and 10 percent more than
in Germany and Italy,'' Schiendl said. ``Given that one can import 800
duty-free cigarettes per person within the EU, our sales in Germany and
Italy would suffer.''

The company's leading own brand, Memphis, currently costs 34 schillings a
pack in Austria, compared to 31 schillings in Italy.

     ``I've heard there could be 5 more schillings a pack in taxes, and
that's going to have a negative effect (on sales),''

Berger said. ``Some Austrians will also use it as an excuse to stop
smoking.''

Schiendl said higher taxes can be compensated this year by the inclusion
of 12 months of sales from Swedish Match's cigarette unit, which it bought
last July for $580 million, compared to six months in 1999.

For 1999, the acquisition helped push up full-year sales by 26 percent to
3.4 billion euros ($3.37 billion), from 2.7 billion euros a year earlier.

Net income, though, declined by one quarter in 1999 to 106.8 million
euros, after Austria Tabak didn't repeat the one-time gains that boosted
profit the previous year. Operating profit climbed 27 percent to 166.9
million euros.

Austria Tabak disposed of property worth 17.7 million euros in 1998, when
it also paid about 36.7 million euros less tax. The retailer was able to
take advantage of tax breaks in 1998 for provisions from its 1995 sale of
Head Tyrolia Mares, a maker of sports equipment such as tennis rackets for
Andre Agassi