[Intl-tobacco] Gallaher, Imperial Look Overseas to Boost Sales (fwd)

[Robert Weissman]

FOCUS-Gallaher profits rise, aims abroad

By David Jones

LONDON, March 1 (Reuters) - British tobacco company Gallaher Group Plc
reported a near seven percent rise in annual profits on Wednesday as it
set out plans to expand abroad to counter the declining UK duty-paid
cigarette market.

The group with a leading 40 percent share of the UK cigarette market said
it was targetting new avenues for overseas expansion like organic growth
in Continental Europe, Africa and China and through alliances or
acquisitions to boost sales.

Gallaher, which produces cigarette brands such as Benson & Hedges and Silk
Cut in Britain, reported 1999 pre-tax profits of 341 million pounds
($539.1 million), on sales up two percent at 4.3 billion. The year
dividend rose 8.5 percent to 22.25 pence.

New Chief Executive Nigel Northridge said the group is aiming to drive its
overseas sales higher this year and also conduct a more aggressive share
buy-back programme afer the company bought back 19.7 million of its own
shares in 1999.

``We will look at opportunities overseas when they arise, but there is no
desperation in doing deals,'' he said.

Gallaher shares were fired up to show a near eight percent rise, or up
18-3/4 pence to 270p by 1000 GMT as the pre-tax number beat forecasts of
333-337 million and analysts applauded the new chief executive's more
aggressive stance on overseas sales.

Northridge, who moved up from sales and marketing director at the start of
the year, said initial overseas growth would focus on Benson & Hedges and
Silk Cut expansion in Spain and Italy, Dorchester in Africa and increased
sales in China.

But he was cautious on naming acquisition targets or favoured regions
after two failed moves last year for the French maker of Gauloises and
Gitane cigarettes, Seita , and a bid for the European business of RJR
International.

Gallaher has lagged its UK arch rival Imperial Tobacco Group Plc (quote
from Yahoo! UK & Ireland: IMT.L) in expanding abroad to counter the steep
annual ten percent fall in the duty paid UK cigarette market which has
resulted in Imperial shares been given a higher rating.

Gallaher earns 82.6 percent of its cigarette profits from the decling
duty-paid UK market, while Imperial, maker of Embassy and John Player,
says 39 percent of its profits are earned abroad and aims for a 50 percent
share very soon.

Northridge said its overseas cigarette volumes slipped 14.8 percent in the
year, but stripping out the troubled market in the Commonwealth of
Independent States of the former Soviet Union and its contracts with
tobacco group British American Tobacco (quote from Yahoo! UK & Ireland:
BATS.L), then volumes were ahead 12.7 percent and profits up 10.6 percent.

Gallaher's overseas expansion stumbled last November when it approached
larger French rival Seita about a possible acquisition offer to prevent
its merger with Spain's Tabacalera. The move failed and the French-Spanish
producer Altadis was created in late 1999.

In the same year, Gallaher teamed up with Marlboro-maker Philip Morris to
pursue RJR International, but the two were outbid by Japan Tobacco .

In the UK, Gallaher's profits rose 7.2 percent helped by the acquisition
of RJR UK's business and increased its market share one point to 40
percent to lead Imperial's 38 percent. But the total duty paid cigarette
market continued to decline due to smuggling, and downtrading to cheaper
brands continued.

Northridge estimates smuggling acounts for 20-25 percent of UK
consumption, with hefty UK duty meaning a 20-pack of its Benson & Hedges
sells at 3.92 pounds compared to 1.75 in France.

Gallaher continues to lobby the UK government ahead of the this month's
financial budget against pursuing its policy to raise cigarette taxes by
the inflation rate plus five percent which is aimed at discouraging
smoking on health grounds.

Gallaher was demerged from U.S. group Fortune Brands Inc in May 1997 and
listed on the London Stock Exchange, but slipped out of the blue chip FTSE
100 index in March 1999.

($1 equals .6327 Pound)