Japan Tobacco Buys Gallaher

Japan Tobacco intends to buy Gallaher for 7.5 billion pounds ($14.7 billion). Japan Tobacco is the third largest cigarette maker in the world.

Tobacco sales decrease in Japan because of high cigarette taxes and cigarette prices accordingy. So buying Gallaher, Japan Tobacco will increase cigarette sales in Russia.

"Gallaher isn't a worldwide brand, but it's strong in Russia where Japan Tobacco is also expanding," said Tokushi Yamasaki, a food and agriculture analyst at Daiwa Institute in Tokyo. "The price may increase because of possible counter bids," he said.

Japan Tobacco shares closed 18,000 yen, or 3.1 %, higher at 597,000 yen in Tokyo. Gallaher added 3 pence to 1,154 pence at the close in London yesterday. The shares of Japan Tobacco increased in 15 % after Financial Times named Japan Tobacco a potential buyer of Gallaher.

"Japan Tobacco is probably bidding this much and then they'll see who else comes out of the woodwork," said Stuart Fraser, who helps manage about 20 billion pounds at Brewin Dolphin Securities Ltd. in London, including Gallaher shares. "Altria Group Inc. or private-equity companies could be rival bidders," Fraser said.

In 1999 Japan Tobacco paid $8 billion to buy international rights to Camel, Winston and other RJR Nabisco brands.

"When Japan Tobacco bought RJR, it was expensive because the transaction value was 15 times more than then RJR's EBITDA, and the assumed offered price for Gallaher was about 11 times," Daiwa Institute's Yamasaki said. "This time, it's not too expensive because the acquisition price among cigarette makers is about 11 times," he said.

Japan Tobacco is going to increase sales in Russia in 40 %. The company announces that they are able to make 70 billion cigarettes annually in Russia. Russia is a good market for cigarette makers, because almost all public places are smokers allowed. Meanwhile, Europe is struggling against smokers. Smoking is being outlawed in schools, restaurants, bars and other public places.

"Russia and Ukraine are the two markets where the potential Gallaher plus Japan Tobacco combination looks most interesting," said David Ireland, an analyst at ABN Amro in London. "We see a high chance of the bid being successful."

By Ruzan Harutyunyan for HULUQ