Nov. 22 (Bloomberg) -- Japan Tobacco Inc., the nation's biggest cigarette company, agreed to buy frozen-food maker Katokichi Co. for 109 billion yen ($1 billion) to double food sales as smokers dwindle in its home market.

Katokichi stockholders will receive 710 yen a share, a 20 percent premium to yesterday's closing price, the companies said in a statement today. Japan Tobacco will then sell a 49 percent stake in Katokichi to instant-noodle maker Nissin Food Products Co. and the three companies will combine their frozen-food units.

Japan Tobacco is moving into emerging markets and expanding food sales to reduce its reliance on Japan, where the percentage of men that smoke has fallen by half over the past 40 years. The Tokyo-based maker of Camel cigarettes bought Gallaher Group Plc in April to add Russian and European tobacco sales and is reported to be planning a bid for Turkey's state-owned Tekel.

``We'd prefer Japan Tobacco to concentrate on their international tobacco business,'' said Erik Bloomquist, a London-based analyst at JPMorgan Chase & Co. ``There's no reason for them to diversify away from tobacco.''

Japan Tobacco shares fell 1.1 percent to 633,000 yen at the 3 p.m. close of trade in Tokyo. The stock has fallen 5.1 percent since Nov. 20 when the Nikkei newspaper reported the possible takeover. Nissin shares gained 2.5 percent to 4,100 yen.

Katokichi shares rose by their daily limit of 100 yen, or 17 percent, to 694 yen, taking their gain over the past three days to 63 percent.

Katokichi President Tetsuji Kanamori worked at Japan Tobacco before he was recruited as a senior executive last year. He replaced Katokichi founder Yoshikazu Kato, who resigned in April, after the company admitted it had overstated its sales for five years.

Food Sales

Annual frozen-food revenue at Katokichi, which last year sold 196 billion yen of noodles, dumplings and other products, will rise to about 260 billion yen when combined with the units from Japan Tobacco and Osaka-based Nissin.

``This acquisition won't be a major contributor to Japan Tobacco's earnings going forward,'' said Junko Miyakawa, an analyst at Shinsei Securities Co. in Tokyo. ``It's not easy to find a business more profitable than cigarettes.''

Japan Tobacco's sales of food, such as its ``Roots'' canned coffee and ``Obento Dai-Ninki'' spring rolls, gained 5.1 percent to 152 billion yen in the six months ended Sept. 30.

Its tobacco sales in Japan, which account for 59 percent of total revenue, fell 0.5 percent to 1.72 trillion yen in the period.

Japan Tobacco, which is 50 percent government-owned, is the biggest traded cigarette maker after Altria Group Inc. and British American Tobacco Plc.

Price Competition

Profit at Katokichi has been hurt by price competition with Nissin, Hiroshi Saji, an analyst at Mizuho Securities, said.

``A cooperative relationship with Nissin is likely to have a positive impact on the company's earnings,'' he said in a Nov. 20 report.

Katokichi also operates a chain of restaurants and bars, which Kanamori said today the company would consider selling.

The offer from Japan Tobacco, which already owns 5 percent of Katokichi, will run from Nov. 28 until Dec. 26.

The takeover was minor when compared with Japan Tobacco's 7.5 billion pound ($15.5 billion) purchase of Gallaher, completed in April, JPMorgan's Bloomquist said.

Japan Tobacco plans to bid about $1.5 billion for Tekel, the London-based Times reported in September.

The Turkish government has said it will accept bids for the state-owned tobacco company until Jan. 25. It withdrew Tekel from sale in 2003 after rejecting a $1.15 billion bid from Japan Tobacco as too low.

To contact the reporter on this story: Mari Murayama in Tokyo at mmurayama@bloomberg.net

Last Updated: November 22, 2007 03:18 EST