Japan Tobacco Inc. announced Friday it will acquire rival Gallaher Group PLC of Britain for 2.25 trillion yen in what is believed to be the largest acquisition by a Japanese company.</PARAGRAPH> <PARAGRAPH>JT said Gallaher's board unanimously approved the offer.</PARAGRAPH> <PARAGRAPH>JT, the world's third-largest tobacco maker, aims to make Gallaher, which is in the No. 5 spot, a wholly owned subsidiary in the first half of 2007.</PARAGRAPH> <PARAGRAPH>Under the terms of the offer, Gallaher shareholders will receive 1,140 pence per share, or 2,635 yen, for each share, which represents a premium of 27.1 percent to the average closing middle market price of 897 pence per share for the three-month period through Dec. 6.</PARAGRAPH> <PARAGRAPH>JT President Hiroshi Kimura told a news conference in Tokyo that the company will pay 700 billion yen in cash and seek the rest in loans from Merrill Lynch Group.</PARAGRAPH> <PARAGRAPH>With the acquisition, JT hopes to boost its global presence, especially in Europe, and to make inroads into Russia and Eastern Europe.</PARAGRAPH> <PARAGRAPH>JT is looking overseas because, while it dominates the cigarette tobacco market here, the number of smokers is declining as taxes rise and people move toward healthier lifestyles.</PARAGRAPH> <PARAGRAPH>'We have reached a decision to boost our global competitiveness by pursuing further economies of scale through the acquisition of external resources,' Kimura said. 'We will realize the –

integration as soon as possible and expand our business to become the world's second and eventually the top maker" of tobacco products.

In fiscal 2005, JT's group sales, which include its beverage, food and pharmaceutical businesses, were 4.64 trillion yen. It sold 409.7 billion cigarettes.

Gallaher had £8.2 billion (1.9 trillion yen) in sales in the business year to last December, selling 173.8 billion cigarettes.

After the acquisition, JT will still be the world's third-largest maker, after Philip Morris of the U.S. and British American Tobacco of the U.K.

With the acquisition, JT hopes to take advantage of Gallaher's blending skills while expanding its distribution network and streamlining operations.

"The important thing is to unite the management of the two companies. We don't need two head offices, so Gallaher's headquarters will be joined with JT's head office," Kimura said, adding JT did not expect to make huge job cuts.

Following the announcement, Standard & Poor's said it placed its AA- long-term corporate credit rating on JT on credit watch for a possible downgrade on negative implications.