BAT shares at 13-month high after US deal


Shares in British American Tobacco, the world's second-biggest cigarette maker, surged to a 13-month high today after a major US deal overnight eased worries about US litigation.

BAT shares jumped 10 per cent to 705 pence on electronic trading platform Instinet despite BAT posting a 20 per cent fall in nine-month earnings to £1.29 billion ($2.19 billion) earlier today.

Overnight, RJ Reynolds Tobacco Holdings agreed to buy BAT's US cigarette and tobacco businesses for more than $3 billion in cash and stock, creating a stronger competitor to market leader Philip Morris.

Under the deal, RJR will assume BAT's US liabilities under the tobacco industry's 1998 master settlement agreement with US states. RJR will also indemnify BAT's Brown & Williamson US unit against future litigation related to the business. "It is an elegant solution to the litigation problem," said a dealer at a European bank. "It is great news. They still have hurdles to get over to convince some of their shareholders who've yet to be won over."

Tobacco analysts have speculated for months there would be a a deal between RJR and BAT, but expectations varied. Some believed RJR would be acquired outright by BAT, while others thought the US tobacco industry's legal woes made combining their US operations more appropriate.

"The group as a whole remains very much on track and the exciting agreement with Reynolds is the best way to achieve our long-term strategic ambitions in the US, while improving both our earnings per share and our cash flow," BAT chairman Mr Martin Broughton said in a statement.