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Gallaher Shares Rise After it Confirms Bid Approach

Shares in British tobacco company Gallaher Group rose to a new high on Thursday after receiving a bid approach which sources close to the situation said came from Japan Tobacco.

Gallaher shares, the world's fifth-largest cigarette group, rose 19.7 percent to 11.71 pounds by 0947 GMT, off a high of 12.10, valuing the company at 7.7 billion pounds ($15.14 billion).

The group did not identify the company behind the approach.

The talks between Gallaher and Japan Tobacco are at an early stage, the sources close to the situation said, but if the bid is agreed it would be Europe's largest tobacco deal, surpassing the $7.8 billion Japan Tobacco paid for the non-U.S. tobacco business of RJR Nabisco in 1999.

A bid is likely to be in cash to attract Gallaher's largely European and United States shareholders, and while a rival bid is unlikely the move may spark a further round of consolidation in the tobacco industry, the sources added.

Gallaher, the maker of cigarette brands such as Benson & Hedges, Silk Cut and Mayfair in Britain and long the subject of takeover rumours, released a statement late on Wednesday that it had received an approach which may lead to a bid after its shares had risen 3.1 percent on Tuesday.

Analysts said only the world's three biggest tobacco groups -- Altria Group, British American Tobacco and Japan Tobacco -- could fund such a bid, but Altria would face anti-trust problems in many markets and BAT has in the past distanced itself from a bid for Gallaher.

Altria, which owns Philip Morris and the Marlboro brand, and BAT both declined to comment.

Japan Tobacco, the world's third-largest tobacco group which is known for its Camel, Winston, Salem and Mild Seven brands, has 1.22 trillion yen ($10.61 billion) in cash and cash equivalents. In June it said it is always seeking possible mergers and acquisitions to raise its global profile after its last major deal in 1999.

In 2003, it was the higher bidder for Turkey's state-run Tekel Cigarette with an offer of $1.15 billion, but the deal fell through after Turkey said it fell short of expectations.

"The market has been looking for the company to use its cash. If they are doing this deal, it's highly likely that if not all of it, the bulk of it will be a cash deal. So that's positive," said Marc Desmidt, head of the Japanese large-cap equity team at Merrill Lynch Investment Managers.

"And it's highly likely that it would be accretive to earnings straightaway, so that's why you're seeing the positive response from the market."

Other UK cigarette shares also rose. Imperial Tobacco Group was up 7.1 percent at 20.21 pounds and British American Tobacco rose 3.6 percent to 14.74 pounds.

Shares in Japan Tobacco climbed almost 6 percent on Thursday and closed up 4.8 percent at 529,000 yen and not far off its year-to-date high of 538,000 yen.

Gallaher earns 70 percent of its profits from the shrinking cigarette markets of Britain, Ireland, Austria and Sweden. To offset this fall it has been expanding into Russia, where it owns the Liggett-Ducat, Kazakhstan and Ukraine brands, and earnings there have risen sharply.

For Japan Tobacco, still 50-percent owned by the Japanese government, overseas cigarette sales have been the main driver of profit growth.

In 2005 its international cigarette volumes overtook its Japanese volumes for the first time. The domestic market is shrinking due to a falling birth rate and an ageing population.

In late June, Hiroshi Kimura took over as chief executive officer and president, and since he had spent the last seven years leading the company's Geneva-based international division, this further fuelled speculation it was looking for acquisitions.

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