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UPDATE 2-UK tobacco shares rise on U.S. e-cigarette ban exemptions

Siddharth Cavale

* Minimal financial impact seen for BAT, IMB - Jefferies

* Users likely to switch to other flavours, cigarettes

* BAT shares up 2.5%, top FTSE gainer, IMB shares up 1.4% (Adds Imperial Brands comment, details, updates stock move)

Jan 3 (Reuters) - Shares in British American Tobacco and Imperial Brands Plc rose on Friday after the U.S. health regulator exempted menthol and tobacco from a list of popular e-cigarette flavours that it has banned under new guidelines.

The U.S. Food and Drug Administration on Thursday said e-cigarette makers will be banned from selling pod-based e-cigarette flavours, including fruit, dessert and mint, in the United States from February.

The ban was less stringent than one U.S. President Donald Trump had proposed in September, when he threatened to remove all flavours, including menthol, from all types of e-cigarettes to curb a teenage vaping epidemic.

BAT shares rose as much as 2.5% and were the biggest gainers in the FTSE 100 index where many shares were hit by heightened tensions in the Middle East.

Imperial Brands was also among the handful of gainers, with its shares up 1.4%.

Fears of an outright ban led BAT and Imperial to lower their growth forecasts for their U.S. vaping businesses last year.

"Following a significant period of disruption and uncertainty, this regulatory clarity is a welcome step towards returning the U.S. vapour market to stability," BAT, the maker of Lucky Strike, Dunhill and Vuse e-cigarettes, said on Friday.

The new FDA guidelines would also allow tobacco makers to bring back some of the banned flavours if their marketing applications passed a substantive review by the FDA.

This removed some ambiguity related to the future of the exempted products, Simon Evans, spokesman for Imperial Brands said.

"In addition to exempting menthol, the FDA guidance is clear that flavoured products will return to the market once they have been approved through the Premarket Tobacco Product Application (PMTA) process," he said.

Brokerage Jefferies said that while vaping sales would take a near-term hit from the new rules, the overall financial impact for BAT and Imperial would be minimal as most users would either switch to menthol or tobacco, or even to higher-margin traditional tobacco products.

"We are actually bullish on implications of this final guidance," Jefferies said.

BAT submitted a marketing application for its Vuse Solo e-cigarette to the FDA in November, while Imperial said it would submit its applications for its Blu e-cigarettes before May.

(Reporting by Siddharth Cavale and Ankur Banerjee in Bengaluru Editing by Saumyadeb Chakrabarty and Jane Merriman)