[Intl-tobacco] BAT Urged to Demerge (fwd)

[Robert Weissman]

March 16, 2000

 BAT Should Demerge To Add Value,
 Reduce Court Risk -DKB

 Dow Jones Newswires

 LONDON -- British American Tobacco PLC (BTI) should consider
 splitting into two, with the parent company retaining only those assets
with
 the highest exposure to litigation risk, Dresdner Kleinwort Benson said
 Thursday.

 DKB tobacco analyst Gerry Gallagher said the market has long frowned
 on BAT's prospects, given its mounting U.S. litigation headaches. He said
 a demerger of assets not directly exposed to U.S. litigation would give
 investors tangible evidence of a ring-fence around the U.K. tobacco
 company's embattled divisions, especially U.S.-based Brown &
 Williamson.

 "The key is to demerge all assets except Brown & Williamson and the
 BAT Co businesses," he said.

 In other words, BAT would act as a shell company retaining 30% of the
 group profits before tax: embattled B&W and BAT Co's African, Middle
 East and Asian-Pacific businesses.

 "If what's happening in the U.S. is sufficient to bankrupt B&W, then the
 plaintiffs will come to the parent company, but find that it's only a shell
 company," Gallagher said. "We believe such a (demerger) could be
 undertaken in the U.K., with no recourse in the U.S. courts."

 The remaining 70% of the business - its Rothmans International assets and
 BAT's European and South American businesses - would therefore be
 able to generate maximum shareholder value.

 Gallagher said the parent company, saddled with embattled,
 litigation-prone assets, would have a low rating and be worth about 82
 pence. The demerged assets - along with BAT's outstanding notes - would
 soon find a much higher rating, given the absence of litigation risk. He
 estimates the new entity would be worth 478 pence.

 "Remember that I'm not proposing a fire sale; the shareholders would still
 receive all the cash flow of the two companies," he said.

 The combined value of the two entities, at 560 pence a share, would be
 much higher than BAT's current trading price of 316 pence.

 A BAT spokeswoman said there are no demerger plans; that the company
 believes litigation uncertainties will eventually ebb, and the share price
will
 one day reflect the company's true valuation.

 In many ways, DKB's demerger proposal would mimic what BAT did in
 1998 with its financial services arm, which was demerged and then merged
 with the Zurich Group (Z.ZFS).

 Investors appear to agree with DKB's argument, which went out to clients
 earlier this week. Although the week has seen some of the shine go off new
 economy stocks and back into the old, there was no other good reason for
 the jump in BAT's share price.

 At 1030 GMT, BAT's shares were up 9.25% to 316 pence, up 35% from
 Monday's 235 pence. Ongoing litigation and regulatory risks have
 pummeled the stock over the past 12 months. In early 1999 BAT shares
 were trading above 650 pence.

 London's second-tier tobacco stocks - Imperial Tobacco PLC (ITY) and
 Gallaher PLC (GLH) - have remained relatively subdued. Imperial is up
 9% this week to 480 pence; Gallaher had been drifting downward this
 week, but at 1030 GMT was trading at 280 pence, 34 pence higher than
 Wednesday's close.

 -By Brian Truscott; 44 171 842 9289; brian.truscott@dowjones.com