UPDATE 3-BAT buys Scandinavian cigarettes as earnings rise

(Adds Chief Exec, Finance Director comments, updates shares)

By David Jones

LONDON, Feb 28 (Reuters) - British American Tobacco, the world's second-biggest cigarette maker, struck its second deal in a week with the purchase of Skandinavisk Tobakskompagni's (ST) cigarettes for 2 billion pounds ($4 billion) as it beat forecasts with an 11 percent rise in 2007 earnings.

London-based BAT (BATS.L) said on Thursday it also planned to cut global costs by 800 million pounds over the five years to 2012, which is more than most analysts had expected, helping boost BAT shares 4 percent to 20.15 pounds before falling back with the market to trade off 0.7 percent at 19.26 by 1345 GMT.

BAT, which agreed to buy Turkey's state-owned cigarette maker Tekel last Friday, is buying 100 percent of the cigarette assets of privately-owned Denmark-based ST with snus and roll-your-own tobacco in an immediately earnings-enhancing deal.

"Good news comes in threes," said analyst Erik Bloomquist at JP Morgan, as the results were above forecasts, BAT planned big cost savings and the ST deal was immediately earnings accretive.

BAT, the company behind such brands as Kent, Dunhill, Lucky Strike and Pall Mall, said its Finance Director Paul Rayner, 53, will retire in April for personal reasons and be replaced by Ben Stevens, 47, BAT's regional director for Europe.

SCANDINAVIAN DEAL

The Danish assets that BAT is buying account for 60 percent of cigarette sales in Scandinavia, led by its Prince brand, and the deal will give BAT market leadership in Denmark and Norway, and around a third of the Swedish and Polish cigarette markets.

It will add around 30 billion annual cigarette sales to BAT's 684 billion sales in 2007, or around the same size as Tekel's annual sales of 32 billion cigarettes. It is paying 11.2 times historic earnings compared with 11.4 times for Tekel.

Under the deal, BAT will exchange its 32.35 percent stake in ST and pay 1.15 billion pounds in cash to give it a value of 2 billion pounds. The move brings annual cost savings of around 60 million pounds by 2011 at a one-off cash cost of 115 million.

"We are buying a good business, with the ability to improve it, the ability to add scale and to use it as a platform for our premium brands," BAT Chief Executive Paul Adams told a briefing.

He added that although Scandinavian markets, like other mature European markets, were seeing cigarette volumes declining around 2 percent a year with public place smoking restrictions and high excise tax, the business it was buying was very profitable with high margins.

BAT said its 2007 adjusted earnings per share rose 11 percent to 108.53p, driven by its biggest brands such as Kent and Pall Mall. The EPS was slightly above analysts' forecast range of 105.8-108.4p and a consensus of 107.4p.

BAT, the world's No 2 cigarette company after Altria (MO.N), reported its like-for-like cigarette volumes fell 1 percent in 2007, well below its 1 to 1-1/2 percent annual growth target, while its 11 percent annual earnings growth beat its medium-term "high single-digit" percentage target.

The group raised its 2007 dividend payout by 18 percent to 66.2p a share, and scaled back its 2008 share buyback target to 400 million pounds from 750 million pounds in 2007 to maintain its credit rating after its two acquisitions.

BAT said 800 million pounds of cost cuts over the next five years will come from supply-chain savings and by improvements in efficiency, but it would not comment on cuts to its 47 factories worldwide or its near 54,000-strong global workforce.

Finance Director Rayner said the cuts would reduce the number of employees but would give no details.

The group's last five-year cuts ending in 2007 trimmed just over one billion pounds off costs and closed 25 factories.

BAT shareholders Swiss luxury goods group Richemont (CFR.VX) and investment group Remgro (REMJ.J), both controlled by the South African Rupert family, said in November they were considering allowing their own shareholders to become direct shareholders in BAT. The two have 29.95 percent of BAT.

Their stakes are a legacy of BAT's 1999 Rothmans takeover.

BAT shares have outperformed the FTSE 100 index by 27 percent over the past 12 months and trade on 15.7 times forecast 2008 earnings, similar to Imperial Tobacco (IMT.L). (Editing by Richard Hubbard and David Hulmes)