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Tobacco shares surge

| Wednesday, Oct. 29, 2003

CHARLOTTE, N.C. -- R.J. Reynolds Tobacco Holdings Inc. reported huge third-quarter losses, a day after the cigarette maker agreed to merge with rival Brown & Williamson to bolster itself against an onslaught of discounted brands and lawsuits.

RJR shares rose nearly 12 percent Tuesday on the news. Investors shrugged off RJR's net loss of $3.45 billion for the third quarter, largely from charges related to a restructuring announced last month, and focused on the merger.

The company announced a merger late Monday with rival Brown & Williamson that will create a tobacco giant that will produce one of every three cigarettes in the United States. R.J. Reynolds will pay $2.6 billion in cash and stock for a 58 percent controlling stake in the new company.

"We believe the new company will be highly efficient and well-positioned to compete in the U.S. market," said RJR chairman and chief executive Andrew Schindler, who predicted the deal would provide "tremendous value to shareholders."

RJR shares soared to $48.36, up $5.11, in midday trading on the New York Stock Exchange. British American Tobacco's U.S.-traded shares gained $2.53, or 11 percent, to $24.55.

During a conference call with industry analysts, Schindler fended off questions about the impact of the merger on RJR's recently announced branding strategy. Two analysts pointed out that the combined company would have competing brands, for example RJR's Salem brand and B&W's Kool premium brand.

The other competing brands are B&W's GPC discount brand and RJR's Doral brand.

"That's the job of the new management team to decide what direction they want to lead this company," Schindler said.

RJR executives told analysts they anticipate getting clearance to complete the deal from the Federal Trade Commission, even though questions have been raised about the merger's impact on the increased concentration of market share in the tobacco industry.

The Winston-Salem-based maker of Camel, Salem and Winston cigarettes said loss for the quarter equates to $41.31 per share, compared with a profit of $139 million, or $1.56 per share, in the same quarter last year.

The huge third-quarter loss was a result of restructuring costs and other charges, including $3.6 billion in charges to write down the value of some of its trademarks and goodwill, the company said.

"Our third-quarter results include significant impairment charges necessitated by the restructuring we announced in September," Schindler said.

But sales also fell sharply. Third-quarter sales were $1.38 billion, down 13 percent from the same quarter a year ago.

Looking forward, RJR adjusted its full-year forecast to an operating loss of about $3.24 billion to $3.29 billion, including pretax restructuring charges of $375 million and non-cash trademark and goodwill impairment charges of $3.59 billion.

The company announced plans in September to cut costs by $1 billion by the end of 2005. The plan calls for eliminating 2,600 jobs, or 40 percent of its work force.

"We are aggressively pursuing our target ... and have already begun implementing $800 million in cost reductions," Schindler said.

Net sales for the first nine months of 2003 were $4.03 billion, down 16 percent from the prior-year period, primarily due to lower volume and higher promotional spending.

The net loss for the first nine months was $3.31 billion, or $39.95, down from a profit of $15 million, or 16 cents per share, in the year-ago period, primarily due to the impairment and restructuring charges.

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