[Intl-tobacco] Gallaher buys Austria Tabak (fwd)

[Robert Weissman]

Gallaher buys Austria Tabak
by Rosie Murray-West
AUSTRIA;
Source: Electronic Telegraph, Saturday, 6/23/01

BENSON & HEDGES manufacturer Gallaher saw its shares tumble 21 to 454p
yesterday after it bought Austria's largest tobacco company for =A31.14
billion.

Austria Tabak, whose brands include Austrian bestseller Memphis, is 41pc
owned by the Austrian government, and Gallaher said it is buying the
government's stake for Eu85 a share in cash, and offering the same terms
for the privately held shares.

Nigel Northridge, chief executive of Gallaher, said the deal was not
expected to realise substantial cost-savings. "This is not a deal about
big synergy benefits. This is about geographical reach. You can now walk
from Galway to Vladivostok on territory where we have brands."

The company, which is the market leader in the UK with its Benson & Hedges
and Silk Cut brands, becomes the fourth biggest cigarette manufacturer in
Western Europe, but analysts are worried that they have paid too high a
price.

Gallaher shares fell 21 to 454p. Michael Smith, analyst at Morgan Stanley
Dean Witter, downgraded his stance on Gallaher from his neutral
recommendation. He believes the shares will underperform the market in the
short term.

"In our view, group earnings will become higher risk and lower quality,
reflecting market share loss in Austria and Sweden," he said.

He added that plans to raise =A3150m through an equity offering would also
lead to near-term weakening in the share price.

The credit agencies also took a bearish view of the deal, meaning that it
will cost more to finance. Moody's moved to lower its rating on the stock
down a notch from Baa2 to Baa3.

Fellow credit-rating agency Standard & Poor's has said that the BBB+
rating it has placed on the shares is under review pending a downgrade.

Austria Tabak is the market leader in Austria, where it has an effective
monopoly on distribution. It is also market leader in Sweden and has
exposure in Germany.

Mr Northridge said he believed the price was a good one. "We would not do
anything where the numbers did not stack up," he said. "I am convinced we
have been very prudent and hope we will surprise on the upside."