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Smoke at Gallaher

Tobacco stocks are in limbo, plagued by litigation worries and price discounting. But some pros are accumulating shares of Gallaher Group (GLH), the largest producer of tobacco products in Britain with a 39% share of that market. One big plus: Gallaher has no exposure in the U.S.--hence no litigation woes that American makers, such as Altria Group (MO), Philip Morris' new name, and R.J. Reynolds Tobacco (RJR) are saddled with. And there's another reason behind the buying: British American Tobacco (BTI), the world's second-largest tobacco company and No.3 in the U.S., is believed to be interested in acquiring Gallaher, now at 37 per ADR (American depositary receipt). "BAT has publicly acknowleged that it's looking to buy another company to spur further growth, and Gallaher fits the bill," says money manager David Cooley of J.&W. Seligman, which has accumulated shares. BAT, whose top products include Kool and Kent cigarettes, has a cash stash of $2.6 billion. It has to do a deal because "it's running out of growth" on its turf, says Cooley. Gallaher, with products such as Benson & Hedges and Silk Cut cigarettes, owns companies in high-growth European markets. For example, Liggett-Ducat, in Russia, acquired in 2000, is expected to provide 20% of Gallaher's growth. Cooley figures Gallaher, which he sees earning $3.52 a share in 2003, vs. 2002's estimated $3.20, is worth 45, or $7.3 billion, in a buyout. Its market cap is $5.9 billion. BAT, trading at 18, has a market cap of $20 billion. Both BAT and Gallaher declined to comment. Analyst Dylan Cathers of Value Line, who rates the stock "above-average," notes that Gallaher has outpaced the S&P 500 and British American shares in the past year.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them. By Gene G. Marcial

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