GALLAHER shares soared 5 per cent yesterday on hopes that the owner of Benson & Hedges and Silk Cut cigarettes is set to become the next takeover target of British American Tobacco (BAT).

The share price rise came after BAT confirmed that it was keen to make acquisitions despite unveiling plans on Monday to merge its US business with RJ Reynolds, a major American rival.

BAT, whose chairman is Martin Broughton, said yesterday that it aims to make further “sizeable” acquisitions, adding that it would have no problem funding them. The company’s remarks prompted a 26p rise in Gallaher’s share price — whose chief executive is Nigel Northridge — to 596p.

Analysts said that Altadis, the French-Spanish maker of Gauloises and Fortuna cigarettes, could also be in BAT’s sights. Shares in Altadis rose 2.5 per cent.

Michael Prideaux, director of corporate and regulatory affairs and a member of BAT’s board, said: “We believe that the right acquisitions are the best way to build shareholder value in the long term. We have a strong balance sheet and could make sizeable acquisitions if we wanted to.”

Analysts said that BAT would have no problem raising £2 billion of debt to fund further acquisitions although they said the company would probably fund deals using its shares.

Anthony Geard, an analyst at Investec Securities, said: “Now that the deal (with RJ Reynolds) has been agreed, the spotlight falls elsewhere.

“It makes sense for BAT to look very seriously at Gallaher, while Altadis could also be a potential bid target because it provides good scope for savings through synergies.”

Gallaher, which also makes Silk Cut cigarettes, Hamlet cigars and Old Holborn rolling tobacco, had a market capitalisation of £3.7 billion at last night’s close.

BAT’s share price rose by 12 per cent to 720p yesterday as investors welcomed the company’s plan to merge its Brown & Williamson (B&W) business in the US, which makes Lucky Strike and Pall Mall cigarettes, with RJ Reynolds, owner of the Camel and Winston brands. Analysts welcomed the deal because RJ Reynolds will indemnify B&W against all existing and any future litigation relating to its US business, warding off many billion dollars in lawsuits that BAT faces.

At the same time, the agreement would enable BAT to compete more effectively in the US with Altria’s Philip Morris, which is the clear market leader with a 50 per cent share. The agreement with RJ Reynolds follows BAT’s acquisition in July of Ente Tabacchi Italiano (ETI), the Italian state tobacco firm, for €2.3 billion (£1.6 billion).

Meanwhile, BAT submitted an indicative offer on Friday for Tekel, the Turkish state tobacco and alcohol monopoly.

In a separate move, BAT yesterday reported a 22 per cent decline in third-quarter operating profits at its B&W business in the US, while group operating profit rose by 2 per cent to £650 million.

RJ Reynolds also reported its third-quarter results yesterday, recording a $3.45 billion loss, compared to a $139 million profit last time. This year’s figure was dragged down by a $3.59 billion charge, in part relating to around 2,600 job cuts announced last month.