(Refiles to correct spelling of Sampoerna in paragraphs 7, 8 and 9 and insert Reuters Instrument Code)
* Buys 85 pct of Indonesia's No.4 Bentoel, to bid for rest
* Deal at a 20 pct premium to Monday's close
* Bentoel shares up 8 pct in Jakarta, BAT up 0.2 pct
(Adds analyst comment, background, updates shares)
By Tyagita Silka and Michael Flaherty
JAKARTA/HONG KONG, June 17 (Reuters) - British American Tobacco Plc bought a majority stake in a top Indonesian cigarette firm on Wednesday, lifting its share in the world's fifth-largest and fast-growing market as it looks to offset flat sales elsewhere.
BAT, maker of Dunhill and Lucky Strike cigarettes, said it paid $494 million for an 85 percent stake in PT Bentoel Internasional Investama, Indonesia's fourth-largest cigarette maker by volume, and would buy up the remaining shares by the end of August.
London-based world number-two cigarette maker BAT, like other major players, is looking to expand in growing emerging markets as western ones are hit by the effects of higher taxes, smoking bans and restrictions on advertising.
"The purchase... makes sense as Indonesia cigarette (market) is dominated with kretek (clove), which accounts for around 93 percent of total cigarettes consumed," said Jakarta-based analyst Ella Nusantoro of Citigroup in a note to clients.
"The remaining 7 percent is white cigarettes, which are dominated by Philip Morris and BAT," she said.
Bentoel sells both plain tobacco cigarettes and traditional clove-flavoured, or kretek, cigarettes under brands such as Bentoel, Star Mild, X-Mild and Country, and has 7 percent of Indonesia's 250 billion annual cigarette market.
BAT's Indonesian unit, PT BAT Indonesia, currently has a 2 percent market share, largely from its Pall Mall brand, but Wednesday's deal will boost BAT to number-four, behind Philip Morris International's HM Sampoerna business which has a 27 percent share, Gudang Garam with 22 percent and Djarum with 21 percent.
BAT say the deal represents 12.9 times underlying EBITDA earnings compared to the 14.1 Imperial Tobacco paid for Altadis last year, and the 13.7 times Philip Morris acquired Sampoerna for in 2005, while BAT paid 11.2 for Denmark's ST and 11.4 times for Turkey's Tekel in 2008.
Philip Morris, the world's largest cigarette company, bought Sampoerna for $5 billion and grew the business to become the nation's number one player from number three, in a market that has grown nearly 13 percent over the last two years.
"We like the strategic rationale of the (BAT) deal. This deal obviously enhances BAT's exposure to attractive growing emerging markets, which already account for more than half of group profits,", said Credit Suisse analyst Rogerio Fujimori.
Indonesia is the fifth-largest market in the world after China, the United States, Russia and Japan, but analysts say the deal is a relatively small one for BAT and the near-term earnings impact should be immaterial.
BAT said in a statement that it bought the shares from several shareholders including Rajawali Group, and expects to complete a tender offer for the rest of the shares by the end of August. The deal values Bentoel at around $575 million.
"This transaction represents an excellent strategic opportunity to enter the very large and growing Indonesian kretek market and will provide a platform for future growth," said John Daly, BAT's Asia Pacific Director.
The group, which also makes Kent and Pall Mall cigarettes, said last month in its earnings statement that growth had slowed for premium brands.
The price is equivalent to 873 rupiah per share, a premium of 20 percent above Bentoel's closing price of 730 rupiah per share on Monday, BAT said in its statement.
Bentoel shares ended up 8 percent to 810 rupiah in a slightly lower broader market, while BAT shares were up 0.2 percent at 1,659 pence in London at 0943 GMT.
Rajawali Group, which was founded by Indonesian entrepreneur Peter Sondakh, said it plans to focus on its core businesses -- plantations, mining and property.
"We bought Bentoel in 1991 when we have been asked to help the company, so actually we were just a financial investor in the company," Darjoto Setyawan, a managing director at Rajawali, told Reuters.
BAT was advised by Deutsche Bank and UBS AG for the deal, while Credit Suisse is advising Rajawali Group. (Additional reporting by David Jones in London and Harry Suhartono in Singapore; Editing by Sara Webb, Lincoln Feast and Simon Jessop)