BAT to retrench, seeks deals

British American Tobacco is eliminating 950 jobs at a German factory and looking for new markets.

London - British American Tobacco, the maker of Lucky Strike cigarettes, is eliminating 950 jobs at a German factory as it moves to cut costs amid a decline in smoking in western Europe.

At the same time, the company said said it’s on the hunt for acquisitions as it reported earnings near analysts’ estimates, helped by increased sales in France and Romania.

Adjusted profit from operations was 2.45 billion pounds ($3.2 billion) in the first half, the London-based company said in a statement Thursday. Analysts expected 2.49 billion pounds. BAT said profit growth will accelerate in the second half. The company’s shares rose as much as 2.1 percent in London.

BAT said in a statement that the staff reductions at the 1 320-worker factory in the Bavarian town of Bayreuth will be implemented over two years. Cigarette production will be shifted to BAT’s other European plants, though the factory will continue to make fine-cut tobacco, it said.

“A challenging economic environment coupled with over-regulation and excessive excise increases in some countries has led to a decline in legitimate volumes,” BAT Germany said in the statement.

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BAT has whittled its total employee count down to about 87 000 at the end of 2015 from about 140 000 in 2001 as higher tobacco taxes and public smoking bans dent cigarette consumption. In the last ten years, the smoking rate in western Europe has declined by 3.6 percentage points to 23 percent, according to data tracker Euromonitor. In March, BAT announced it was closing a factory in Malaysia due to the rising costs of cigarette production.

BAT, the world’s third-biggest listed tobacco company, has a 19 percent share of the German tobacco market. Roll-your-own cigarettes have become popular in Germany as consumers have sought lower-tax alternatives.

On the hunt

At the same time, the cigarette maker is looking for new markets. “If there are any good deals out there, we would be interested,” CEO Nicandro Durante said in an interview on BAT’s website. “M&A has been quite an important component of the results in the first half.”

While analysts say that most of the big takeover opportunities in the industry have disappeared, the company has spent more than 5 billion pounds in past years on deals including a minority stake in its Brazilian unit and TDR, Croatia’s biggest cigarette maker. BAT shares have gained 28 percent this year to record levels as the stock has become a haven for investors betting that weaker sterling will help spur profit growth.

Translating earnings from abroad back into pounds will give a 4 percent boost to full-year earnings at current exchange rates, the company said. However, the tailwind is mitigated by the effect of buying tobacco in dollars and selling in many emerging markets, which BAT expects will hurt profit by 6 percentage points.

BAT - which generates less than 1 percent of its revenues domestically - doesn’t see a material effect on its business from the UK’s vote to leave the European Union, although the cigarette maker said the decision does create regulatory uncertainty.

“We don’t know whether the EU tobacco products directive, which has been transposed into national law, would be kept in the UK or not," BAT’s director of legal affairs Jerry Abelman said by phone.

That directive imposes more stringent regulation of the tobacco industry across the European Union.

BAT and its competitors are meanwhile losing a battle against European regulators, who are paving the way for plain packaging on cigarettes. The company has filed a legal challenge against the French government’s decision to pass plain packaging into law, Abelman said. BAT lost a similar challenge in the UK.

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