BAT offers to buy U.S. tobacco firm Reynolds in $47 billion deal

• Deal brings together Newport, Kent and Pall Mall brands
• BAT offers US $56.50 a share, a 20% premium
• BAT already owns 42% of U.S. groupCash and shares deal values 58 pct stake at U$47bn
• BAT shares up 2.7%

 REUTERS: British American Tobacco has offered to buy U.S. tobacco company Reynolds American Inc in a US$ 47 billion deal that would bring together Newport, Kent and Pall Mall cigarettes in the world’s biggest listed tobacco company.
The takeover would give BAT a leading position in the high-value United States market and more premium brands such as Camel which it can sell in countries including Russia and Turkey where demand for Western cigarettes is still growing.

The British group, which already has a 42 percent stake in Reynolds, said its offer valued the company’s shares at US$ 56.50, of which US$ 24.13 would be in cash and US$ 32.37 would be in BAT shares, representing a premium of 20 percent over the closing price of Reynolds stock on Thursday.

The total price for the remaining 57.8 percent of Reynolds would be US$ 47 billion, of which approximately US$ 20 billion would be in cash and US$ 27 billion in BAT shares, BAT said.
BAT Chief Executive Nicandro Durante said the deal would create a U.S. market leader and the world’s largest listed tobacco company by net turnover and operating profit.
“The strategic rationale makes perfect sense,” Guy Ellison, an analyst at Investec Wealth & Investment, said. The deal would pivot BAT further towards the high value U.S. market, consolidating some strong brands and Reynold’s position in “next generation tobacco” products such as e-cigarettes, he added.
The cost synergies associated with the proposed merger are estimated by BAT to be relatively modest at around US$ 400 million.
Reynolds bought Newport-maker Lorillard in 2015, making it a stronger competitor to Marlboro-maker Altria Group. Together, Reynolds and Altria dominate the U.S. market.
Reynolds, based in Winston-Salem, North Carolina, has yet to respond to the unsolicited offer. Because BAT already has such a big holding in the U.S. group, rules set by the U.S. Securities and Exchange Commission require disclosure of such an approach as soon as it has been made.
Since Britain’s shock vote to leave the European Union in June, shares in BAT soared to all-time highs as investors bet the falling pound would boost the profits of companies that make most of their revenue outside the United Kingdom.
BAT shares, which reached a high of 51.35 pounds in July, were trading up 2.3 percent at 49.34 pounds at 0848 GMT. If successful, the takeover would be one of the biggest this year globally.
The tie-up is also one of the only mega deals left in a global tobacco industry which is already dominated by six companies, and it would create the only player with a major presence in both U.S. and international markets.

A spokesman for Reynolds was not immediately available outside U.S. business hours. BAT is being advised by Centerview, Deutsche Bank and UBS.
Smoking rates in the United States and other western markets are declining, due to increasing health consciousness and greater regulation and taxes. All big tobacco firms are investing in e-cigarettes and other vapor-based products, to diversify.

BAT has in recent years focused on international markets such as Ukraine, Bangladesh, Russia, Vietnam and Turkey where smokers are increasingly choosing premium cigarettes like its Dunhill, Lucky Strike, Pall Mall and Rothmans brands.
Its brands are sold in more than 200 markets, with market-leading positions in at least 55. Shares in Reynolds fell to a 12-month low on Wednesday of US$ 43.38 after its third quarter earnings were 6 percent short of market forecasts, Jefferies analysts said, on the back of a 1.5 percent fall in domestic cigarette volumes.

BAT also said yesterday it had performed well in the first nine months of the year, raising both revenue at constant rates of exchange and cigarette volumes.
Year-to-date revenue grew 8.1 percent at constant rates of exchange, it said, as its biggest brands sold 9.8 percent more cigarettes.