[Intl-tobacco] BAT escapes US smoking lawsuits (via RJR-B&W merger)

[Robert Weissman]

BAT escapes US smoking lawsuits

David Teather in New York
Thursday June 24, 2004
The Guardian

British American Tobacco's $3bn (=A31.6bn) deal to sell its US tobacco
business to rival cigarette maker RJ Reynolds and shield itself from costly
future lawsuits cleared a significant hurdle after Washington finally
approved the sale.

Shares in BAT reached record highs after the deal was given the go-ahead,
adding 59.5p in London to close at 883p, up 7%.

The merger of the second and third largest American tobacco firms now
seems likely to proceed by July.

The federal trade commission, the US competition authority, approved the
merger of BAT's Brown & Williamson division and RJR without imposing
conditions, an outcome that had been far from certain. The agreement still
needs approval from the American financial regulator, the securities and
exchange commission, but the FTC was viewed as the prime obstacle.

BAT will own 42% of the combined company but will be indemnified from
all present and future tobacco litigation in the US.

The tobacco industry in the US still faces a tide of health-related lawsuit=
s
and RJR will assume the defence of all outstanding cases against Brown &
Williamson.

"It was a master stroke when they sorted out the way to ring-fence their US
legal problems, and the share price reaction shows just how much it is
worth," said Hilary Cook, director of investment strategy at Barclays
Private Clients. "There was clearly a genuine threat it would be
blocked."

Deutsche Bank raised its target on BAT shares from 870p to 930p.

The new, publicly traded firm, which will be named Reynolds American,
will control about 30% of the US cigarette market. That closes the gap on
Philip Morris USA, which owns the Marlboro brand and makes around half
the cigarettes sold in America. Reynolds makes brands including Camel,
Winston and Salem, while Brown & Williamson is behind Kool, Pall Mall and
Lucky Strike.

The FTC said it had approved the deal because of the rapidly changing
American tobacco market, which is being flooded by cheaper cigarettes from
smaller companies. It also noted that Brown & Williamson was playing "an
increasingly minor role" in the US market.

The discounters are not part of the 1998 settlement of legal claims
filed by
46 American states, forcing the big four tobacco firms to pay $246bn over
25 years. The cost of the settlement has caused the large manufacturers to
put up their prices.

The makers of discount cigarettes, meanwhile, are able to offer their
products at significantly lower prices, and brand loyalties are being put
under strain. The discount brands account for between 11% and 14% of
sales in the US, according to various estimates. "I am delighted that the
uncertainty over the planned merger is largely over," said BAT's chairman,
Martin Broughton.

There was further good news for BAT shareholders when the companies
disclosed that US officials had approved a scheme to make the deal tax-free
for investors in both firms.

As part of the deal, RJR will pay BAT $400m in cash to acquire Lane
Limited, a maker of cigar, roll-your-own and pipe tobacco brands, and the
distributor of Dunhill products in the US.