updated 12/15/2006 7:46:54 PM ET 2006-12-16T00:46:54

Japan Tobacco Inc., the world’s third biggest cigarette company, is buying Britain’s Gallaher Group PLC for about $14.7 billion in a deal that gives the maker of Mild Seven cigarettes a bigger stake in the Western European market. The deal would reportedly be the biggest Japanese overseas acquisition.

The move comes as Japan Tobacco, which already is the overseas distributor for Winston, Camel and Salem cigarettes, tries to bolster earnings by expanding outside of Japan, which has seen declining smoking rates. Like many tobacco companies worldwide, Japan Tobacco has also been looking to diversify outside cigarettes.

The deal would take Japan Tobacco into a Western Europe market where it has little presence. Japan Tobacco has operations in Russia but was rejected last year in a bid for Turkey’s state-run Tekel tobacco company.

“The integration of our business operations and our portfolios will position our international tobacco business for continued growth,” JT President and Chief Executive Hiroshi Kimura said in the company statement.

Tokyo-based JT is offering 1,140 pence for each outstanding share of its British rival, or a total of 7.5 billion pounds. It will also assume debt of roughly 2.25 billion pounds ($4.41 billion) in the deal.

Kyodo News agency said the deal would be Japan’s biggest foreign acquisition since NTT DoCoMo Inc.’s $9.8 billion purchase of a stake in AT&T Wireless Group in 2001.

The combined company would have annual global output of 600 billion cigarettes, Japan Tobacco said in a news release. It would remain at No. 3 behind Altria Group Inc. of the United States and Britain’s British American Tobacco.

Credit Suisse has said the deal would be a “particularly good strategic fit.” It would address Japan Tobacco’s sub-scale position in Western Europe and strengthen its competitive position in Eastern Europe, the brokerage said.

Fitch Ratings said a combination of the two companies would create a group with annual earnings of around $5.2 billion and catapult it to a position of market leader in the high-growth Russian market, with a share of almost 35 percent. That would be ahead of British-American Tobacco’s 23 percent and Altria-owned Philip Morris International’s 27 percent in the world’s second-largest tobacco market.

Gallaher, which employs 12,000 people worldwide, dates back to 1857, when Tom Gallaher started a business making Irish roll tobacco in Londonderry, Northern Ireland.

The company has been under pressure in a tough European market, particularly from additional taxation and increased competition in Spain and Austria.

It said in September that it was too early to assess the long-term impact of a ban on public smoking in Scotland but thinks similar bans due to be introduced across Britain next year will have a “moderately negative” impact.

Japan Tobacco shares rose 3.1 percent to close at 597,000 yen ($5,068) in Tokyo Friday. Shares in Gallaher, the world’s fifth largest tobacco company, slipped 0.5 percent Friday to 1,149.5 pence ($22.59).

The purchase would boost Japan Tobacco’s share of the European tobacco market to 23 percent from 10 percent, according to the Nihon Keizai newspaper. JT’s global market share would jump 3.1 percent to about 11 percent, it said.

It also highlights bolder strategies Japanese companies are taking as they seek ways to grow. Earlier this year, Nippon Sheet Glass Co. bought Pilkington PLC, a British rival that was twice its size, in a $3.8 billion deal.

After the announcement, Standard & Poor’s Ratings Services placed JT’s “AA-” long-term rating on credit watch with negative implications. It said that JT has good liquidity and no debt, but that its financial status will deteriorate as it pays for the takeover. The negative impact could last for one to two years, S&P said.

But looking long-term, the purchase should bolster Japan Tobacco’s business.

“JT aims to boost its earnings base in overseas markets, which are expected to grow. In the medium to long term, this acquisition should lead to a stronger business franchise, supported by an expanded brand portfolio and geographically diversified earnings sources,” S&P said in a statement.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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