Firm to Shed Last of Its Tobacco Units

American Brands Inc. said Tuesday that it is completing its exit from the tobacco business as the legal and regulatory climate for cigarette companies becomes tougher in the United States.

American Brands, which also sells liquor, sports equipment and household hardware products, said it will spin off its British-based Gallaher tobacco business and then change its own name to Fortune Brands.

American Brands stock rose $3.625 to close at $48.125 on the New York Stock Exchange. .

The Old Greenwich, Conn.-based company, whose products include Jim Beam bourbon, Master Lock padlocks and Titleist, Foot-Joy and Cobra golf equipment, said that as part of the divestiture, Gallaher will pay Fortune Brands about $1.4 billion.

After the deal goes through, the company said, the new Fortune Brands will use the after-tax proceeds of about $1.25 billion to pay down short-term debt and finance growth.

Chairman Thomas Hays said the company will be well positioned to continue its aggressive acquisition program, which scored a stunning success with its purchase last year of Cobra Golf.

“We intend to support all of our companies,” Hays said in discussing possible areas of expansion.

American Brands, which sold off its U.S. tobacco operations in 1994, said the Gallaher spinoff will strengthen the British-based company by removing it from the current harsh environment for cigarette makers in the United States.

The business environment for tobacco sales in the United States has never been more threatening, with lawsuits mounting and a new level of regulatory oversight being undertaken by federal authorities.

With sales topping $6.5 billion for the year ended June 30, Gallaher, whose major brands include Benson & Hedges and Silk Cut, is the tobacco market leader in Britain. It also has strong international sales, principally in Europe.

American Brands denied that its spinoff plan was in response to a recent announcement that 40 British smokers plan to sue Gallaher to recover medical costs.

“The company spent many months thoroughly reviewing various alternatives, so it has nothing to do with anything that happened 10 days ago,” a spokesman said.

Although American Brands in effect removed itself from the potential liabilities of the tobacco industry when it sold its U.S. tobacco operations in 1994, Hays acknowledged that the divestiture would reinforce the perception that the company has isolated itself from possible litigation.

“I think it’s part of the benefit, certainly,” he said in an interview. “There was some ongoing confusion--were we still in the domestic tobacco business?”

American Brands, which would retain its headquarters in Old Greenwich, said the move will allow it to concentrate on its other business lines, which had $4.6 billion in sales for the year ended in June.

The company said that once it becomes Fortune Brands, it expects to see earnings growth of between 13% and 15% a year.

“That’s substantially higher than the 10% goal we had established for American Brands,” the company said.

American Brands said it expects shares of Gallaher to be listed on the London Stock Exchange and on the New York Stock Exchange in the form of American depositary receipts. It also said Gallaher plans to borrow about $1.4 billion to pay for the transaction.

Once the spinoff is completed, American Brands said, the new Fortune Brands will consider repurchasing up to 10 million Fortune shares.

The company said the spinoff is contingent on favorable tax rulings, which are more complex due to the international aspects of the transaction.