Fast Burn

Shifts in Britain's $3.6 billion tobacco industry have bankers and investors doing a not-so-slow burn. It all began when a fight for control of Gallaher Ltd., the industry's second largest company ($940 million in annual sales, 27% of the market), turned into an all-American battle between Philip Morris and American Tobacco Co. With more and more of their industries being bought out by U.S. corporations, Britons were scarcely cheered to see another such move. What bothered them more was the way the takeover was handled. With the aid of two prestigious British financial advisers, Cazenove and Morgan Grenfell, American Tobacco scooped up a commanding 16.6% of Gallaher's shares by offering a select price to big shareholders. That, complained the City, violated Article Seven of the recently written "takeover code," which makes it unethical to make a purchase offer to some shareholders instead of to all.

Shades of Buck. The battle began after Imperial Tobacco, leader of the industry, decided to sell most of its 36.75% interest in Gallaher to get money for diversification. Philip Morris quickly moved in. Chairman Joseph Cullman III slapped down $110,400,000 for 50% of Gallaher's stock. Cullman's offer had two effects. Gallaher's board of directors stiff-upper-lipped it as "quite inadequate." And a major Gallaher shareholder that up to now had been satisfied with the status quo was shaken into action. American Tobacco has been a part of the market ever since 1901 when Founder James B. ("Buck") Duke stomped into London and tried to move into the industry. To keep him out, 13 British companies amalgamated into Imperial Tobacco, which is now Britain's largest tobacco company. Imperial later bought a substantial share of Gallaher. American nevertheless ended up with intercontinental marketing agreements and eventually 12.9% interest in Gallaher.

American decided to outmaneuver its U.S. rival by increasing its own share of Gallaher. Apart from prestige, one good reason for doing this was to take control of the company and use it as an English avenue for some interesting new products. English smokers are as taken by filters as American smokers, and American Tobacco Chairman Barney ("Brand-a-Month-Barney") Walker has plenty of brands for the British market, led by fast-selling Tareyton. In addition, Walker can also introduce through Gallaher such products as Mott's apple sauce, Sunshine Biscuits, and perhaps even Jim Beam bourbon.

Walker therefore dispatched Executive Vice President Robert K. Heimann to London with an offer of $115,200,000 for 27,325,000 Gallaher shares. "We are here to defend our investment," explained Heimann. "We don't want 100%. We only want control."

The Bride Was Willing. Gallaher was inclined to accept the offer. "Independence is sweet," said Chairman Mark Norman. "But there comes a time when matrimony is attractive too." Cazenove, which had handled the sale of Imperial's stock in Gallaher (at $2.40 a share) knew just where to find the necessary shares (at $4.20). In one amazing hour of purchases, 12.2 million shares worth $51 million were accumulated in American's behalf.

So fast did American and its allies move that they precipitated a moral crisis in London's financial community. The City's "Takeover Board" charged that Morgan Grenfell and Cazenove had violated its code. But shortly thereafter, the board admitted that it really had no enforcement powers. At week's end the City was treated to the spectacle of an emasculated board that reversed itself and decided that the companies in question "were within the letter and spirit of the code." American had won Gallaher's. But the end result seemed likely to be the establishment of a new and separate agency to preside over all mergers involving British companies and foreign investors.

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