BAT Reports Higher Profit, Buys ST Group's Cigarette Business

BAT Reports Higher Profit, Buys ST Group's Cigarette Business

Feb. 28 (Bloomberg) -- British American Tobacco Plc, the maker of Lucky Strike cigarettes, reported a 12 percent gain in profit after raising prices and said it's buying ST Group's cigarette business for 20.3 billion Danish kroner ($4.1 billion).

Full-year net income climbed to 2.13 billion pounds ($4.2 billion) from 1.90 billion pounds in 2006, the London-based company said today in a Regulatory News Service statement. That was lower than the 2.17 billion-pound median estimate of 10 analysts surveyed by Bloomberg.

BAT, the world's second-largest publicly traded cigarette maker, is charging more for tobacco in countries from Brazil to Russia and has shut plants in western Europe and North America as developed markets restrict smoking. The U.K. company last week agreed to buy Turkey's state-owned Tekel for $1.72 billion, gaining access to a market where 60 percent of adult males smoke.

``Brand strength, marketing and geographic exposures will become critical to longer term earnings growth,'' Jonathan Leinster, an analyst at UBS with a ``buy'' rating on BAT wrote in a note to investors before the results.

BAT saved 729 million pounds in the four years through 2006 with the help of 24 factory closings. BAT no longer has any U.K. factories and is scheduled to shut a Dutch plant this year.

Sales gained 2.6 percent to 10 billion pounds, more than the survey's 9.87 billion-pound median estimate. Profit from operations rose 11 percent to 2.91 billion pounds, less than the 2.99 billion pounds estimated by the analysts.

BAT rose 26 pence, or 1.4 percent, to 1,939 pence in London yesterday. The stock added 38 percent in 2007, more than the 17 percent gain by larger rival Altria Group Inc., the maker of Marlboro cigarettes.

Falling Consumption

Tobacco consumption is falling 1 percent to 2 percent a year in western Europe because of higher taxes and bans on advertising and indoor smoking. England barred smoking inside public places such as pubs in July, and France and the Netherlands are tightening restrictions this year.

While sales are ebbing in developed markets, more people are smoking in emerging markets, helping BAT stock to triple over the past five years. Chief Executive Officer Paul Adams beat the company's goal for earnings-per-share growth in the high single digits every year between 2004 and 2006.

BAT said in May that higher prices would fuel revenue gains in 2007 as growth in volume sales of cigarettes weakened. Takeovers such as Japan Tobacco Inc.'s purchase of Gallaher Group Plc in April have cut the number of companies in the industry, giving those that remain more leverage to increase prices.

Pall Mall, Nanotek

A pack of Pall Mall cost 2.20 euros in Spain at the end of the third quarter, up 13 percent from a year earlier. Altria was charging 5.30 euros a pack for Marlboro in France, up 6 percent from a year earlier, according to Altadis SA, the Madrid-based maker of Gauloises cigarettes.

Adams said in November that fourth-quarter profit growth would slow as BAT increased spending to start selling Kent Nanotek, a premium ultraslim cigarette, in eastern Europe and to expand its distribution network in Russia.

Altria, the world's largest publicly traded cigarette maker, in January forecast growth this year of between 9 percent and 11 percent in earnings per share from continuing operations, led by its Philip Morris International unit, whose cigarettes are sold in more than 160 countries. New York-based Altria is scheduled to spin off the division next month.

Reynolds Stake

The U.K. company controls a 42 percent stake in Reynolds American Inc., the second-biggest U.S. cigarette maker. Fourth- quarter profit rose 65 percent to $297 million as year-earlier earnings were cut by $90 million to reduce some brands' value, the maker of Kool and Winston cigarettes said this month.

BAT was started in 1902 to settle a trade war between U.S. and U.K. cigarette makers and once owned companies from American retailer Saks Fifth Avenue to British insurer Eagle Star. Geneva- based Cie. Financiere Richemont SA, the world's largest jewelry maker, controls about a stake of about 19 percent and has said it would mull spinning off the holding.

Tobacco use will kill 1 billion people in this century, a 10-fold increase over the previous 100 years, unless governments in poor nations raise taxes on consumption and mandate health warnings, the World Health Organization has said this month.


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