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.