B.A.T Industries agrees to buy American Tobacco for $1 billion


In a move that would strengthen its position as the nation's third-biggest tobacco company, B.A.T Industries PLC said yesterday that it had agreed to buy the American Tobacco Co. from American Brands for $1 billion in cash.

The transaction, subject to regulatory approval, won applause from Wall Street analysts, who said it made sense not only for the two companies but also for the besieged tobacco industry.

"For B.A.T, it's an immediate positive impact on earnings," said Roy D. Burry, an analyst for Kidder Peabody & Co. "For American Brands, it's $1 billion for a business that has a declining share of the market, with no chance of turning around."

Investors seemed to agree. Shares of American Brands surged $2.875, to $34.625, on the New York Stock Exchange yesterday. B.A.T's American depositary receipts rose 56.25 cents, to $13.75. Prices of big competitors like Philip Morris and RJR Nabisco also rose in heavy trading.

In addition to the positive economics of the deal, the acquisition completes an association that began in 1902. That year, the American Tobacco Trust, put together by James Buchanan Duke, controlled about 90 percent of the American market.

But Mr. Duke, seeking even bigger profits, visited Britain, where American Tobacco and a newly formed British company, Imperial Tobacco, formed B.A.T as a joint venture; American Tobacco owned 60 percent and Imperial the remainder.

The arrangement stood until 1911, when American Tobacco was found in violation of the Sherman Act and was broken up. As a result, American Tobacco's ownership of B.A.T was severed.

Since then, B.A.T has expanded into the United States. It owns the Brown & Williamson Tobacco Corp., which has about 12 percent of the American cigarette market, with brands like Kool, Capri and Viceroy. Last year the company had total domestic sales of $2.4 billion.

B.A.T does not break out operating profit information for its U.S. operations. Worldwide, Brown & Williamson had a total trading profit of $385 million last year.

By comparison, American Tobacco, whose brands include Lucky Strike, Pall Mall, Carlton and Tareyton, has about 7 percent of the U.S. market. Last year the subsidiary of American Brands had operating income of $169 million, on revenues of $1.51 billion.

Even with the addition of American Tobacco, B.A.T will still be behind Philip Morris, which has 43 percent of the U.S. cigarette market, and RJR Nabisco, which has 28 percent. But analysts said the company that emerged from the takeover would be a far more effective competitor than its predecessors.

Indeed, with cigarette use falling about 2.5 percent a year and profits from domestic sales under pressure, there were probably few companies not already in the tobacco business that would have been interested in buying American Tobacco.

"This is not the sort of market that people who are not already in the business would choose to get into," Martin F. Broughton, the group chief executive for B.A.T, said in a telephone interview from London. "But if you are in it, it is a buyer's market."

It is also not a business that American Brands is leaving behind. Although it has interests in distilled spirits, life insurance, hardware and home improvement products, tobacco will still be its most important business, even after the sale.

It is hanging on to its British subsidiary, Gallaher Tobacco, which has more than 40 percent of Britain's cigarette market.

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