Up in smokes

PORTFOLIO JOHN BULL

The formal offer documents which set out the full terms of the Philip Morris bid for half the ordinary shares of Gallaher (in which I have recently become a shareholder) have arrived. They add strength to the case for buying Gal- laher at the present time—that backed by the Philip Morris management, the company should move ahead much faster than hitherto.

Philip Morris's performance in its home terri- tory, the us, has been first class. Its market share in 1963 was 9.6 per cent. In 1964 the Morris proportion was up to 9.9 per cent; by 1965 it had reached 10.6 per cent, in 1966 it was 11.4 per cent, and last year exactly 13 per cent of the available business fell to Morris. One reason for Morris's success comes from the fol- lowing statistic: 'in 1967 approximately 73 per cent of the cigarettes sold for consumption with- in the United States were filter cigarettes, and filter cigarettes represented approximately 93 per cent of Philip Morris's total unit sales of cigarettes in the United States.' Compare that with the Gallaher position: last year its pro- duction of filters amounted to only 55 per cent of its total output compared with 68 per cent for the British industry as a whole.

Apart from getting Gallaher more whole- heartedly into filter cigarettes, Morris would also try to build up Gallaher's export trade, which at the moment is tiny. Morris already has an elaborate overseas sales organisation into which Gallaher tobacco products could be fed.

Indeed, Philip Morris International, as this pasi-r t-J of the business calls itself, was responsible for one third of the group's earnings in 1967. As for the seven questions put to Morris by the Gallaher board, these have drawn fairly routine answers. But among them the following points stand out. Morris will not say what i:, a high and what a low level of advertking expenditure. But it is pointed out that while the Morris share of the American market has been expanding, so have earnings per share ($1.97 a share to $3.94 a share between 1963 and 1967). As for divi- dends, the idea that British minority share- holders might be left out in the cold is repudi- ated; 'we believe, generally speaking. that divi- dends are justified by earnings and that when earnings show good increases dividends should be increased.'

All of this goes to show that the prospect of becoming a minority shareholder in an Ameri- can-run Gallaher is not one which should be avoided at any price. The partnership should be fruitful for Gallaher shareholders. The ques- tion which the Morris bid document does nothing to answer is what the present value of Gallaher is—whether 25s a share for half the equity is or is not a fair price. For guidance we await the formal reply from the Gallaher board. The directors' present view 'is that shareholders should take no action on the offer for the time being. I shall follow that advice.

I said that I would wait to see the annual report from Lyle Shipping before making up my mind whether or not to keep the shares, which are in my first portfolio. The chairman, Mr Percival Agnew, says that benefits of in- creased freight rates arising from the clostaTO of the Suez Canal are now being felt. And Ice expects 'a further satisfactory improvement' in

results of the current year. Devaluation, appa- rently, does not affect the figures. Somewhat heartened by Mr Agnew's remarks, I shall keep the shares.

Valuation at 10 July 1968 First portfolio 100 Empire Stores at 68s 9d ..

50 Phoenix Assurance at 186s 3d 225 Lyle Shipping at 22s 6d 100 Unilever at 80s 9d ..

£2,000 War Loan at £461 300 Witan at 21s 6d ..

100 E. Scragg at 117s ..

250 John Brown at 48s 6d ..

100 Barclays Bank at 88s 6d 200 Throgmorton Secured Growth (Capital) at 18s 100 National and Grindlays at 68s 6d 500 Clarkson (Engineers) at 15s 3d ..

60 Rio Tinto Zinc at 149s 440 Associated British Foods at 12s 9d Cash with local authority at 71 per cent £6,492

Deduct: expenses £122

Total £6,370 Second portfolio 1,000 Brayhead at 15s 44-d £768 600 Pillar Holdings at 13s 74d .. £408 500 Negretti and Zambra `A' at 16s .. £400 700 Gallaher at 25s 9d £901 Cash in hand .. £2,839 £5,316

;1 Deduct: expenses £72

Total £5,244 £344 £466 £257 £404 £925 £322 £585 £606 £442 £181 £342 £381 £447 £280 £514