BAT increased the cash element of a cash-and-share bid for the 58 percent of Reynolds that it doesn’t already own. The new offer values each Reynolds share at $59.64, the London-based company said Tuesday, more than the $56.50 it proposed on Oct. 21.
The combination marks the latest stage in a wave of consolidation for the tobacco industry, which is struggling with shrinking demand for traditional cigarettes and an uncertain pathway to new technologies. Reynolds is attractive to BAT because it’s a leader in the nascent U.S. market for e-cigarettes.
The offer “makes sense strategically and operationally and just about washes its face financially,” wrote Mirco Badocco, an analyst at RBC Europe.
BAT shares rose 1.2 percent to 4,820 pence at the start of London’s trading day. Reynolds shares climbed 0.4 percent to $55.97 in New York on Friday, the most recent trading day.
BAT said a committee of independent Reynolds directors unanimously approved the offer, which will boost the U.K. company’s earnings per share in the first year after completion.
The new offer of $29.44 in cash and 0.526 of a BAT share for each Reynolds share is about 5.6 percent higher than the previous one. Analysts have said a possible corporate tax cut by President-elect Donald Trump would justify an increase of as much as $8.2 billion in the bid.
BAT has held its current stake in Winston-Salem, North Carolina-based Reynolds since the U.S. company was created in 2004, and the two tobacco giants are close partners. BAT estimated that the transaction would create cost synergies of about $400 million.
Combined, the two companies would overtake Philip Morris International Inc., the maker of Marlboro, as the world’s largest publicly traded tobacco company. It also would give the U.K. company a strong foothold in the U.S. and access to Reynolds’s leading electronic-cigarette position. China National Tobacco Corp., run by China’s State Tobacco Monopoly Administration, is the biggest tobacco company overall.
BAT has been at the forefront of industry consolidation. The company spent about $2.4 billion in 2015 on a buyout of its Brazilian Souza Cruz SA unit, and it previously part-funded Reynolds’s takeover of Lorillard Inc. -- a move that let BAT maintain its 42 percent stake in the maker of the Camel brand.
Centerview Partners, Deutsche Bank and UBS AG advised BAT on the deal, while JPMorgan Securities and Lazard acted for Reynolds.
|© Thomas Mulier BC-BAT-BUYS-REYNOLDS|
Tobacco companies announce $49-billion merger – will others follow?
A British tobacco company is swallowing its US rival in a $49-billion deal slated to make it the world’s largest listed tobacco company.
British American Tobacco (BAT) announced on Tuesday that it will purchase Reynolds American, Inc., placing brands such as Newport, Lucky Strike, Camel, and Pall Mall, as well as newer products like e-cigarettes, under its umbrella. The company’s executives view the move as an investment in the American tobacco market, which is the second most profitable in the world, following China’s.
"It will create a stronger, global tobacco and NGP [next generation products] business with direct access for our products across the most attractive markets in the world," BAT Chief Executive Nicandro Durante said of the merger on Tuesday. "This is the right moment to make the deal; the multiples of BAT and Reynolds are closer than ever before."
As more people in Western nations leave behind traditional cigarettes for products like e-cigarettes, which manufacturers have marketed as safer alternatives to combustible ones, similar deals could likely follow, analysts say. The sale has put BAT at an advantage with those seeking newer products in the growing US market as well as those in developing countries, who more often choose less expensive traditional cigarettes and see fewer anti-smoking campaigns.
Prior to the sale, BAT already owned more than 40 percent of Reynolds. By making a further investment, the company can now exercise full leadership and control of Reynold’s products, their direction, and profits.
Some say that company’s increased size and influence could lead others to bolster their own efforts and merge together, allowing them to serve both the traditional and e-cigarette markets that vary in size around the world.
"The sheer scale of the enlarged BAT raises the pressure on the remaining players to bulk up too, and attention is likely to turn to Britain's Imperial Brands, who look more and more like a minnow swimming in a tank of big, hungry fish," Steve Clayton, a fund manager for financial services firm Hargreaves Lansdown in the UK, told Reuters.
Forays into new products are becoming vital survival strategies for tobacco companies in the 21st century, as smoking has continued to pick up stigma. Last fall, Philip Morris International, then the largest worldwide tobacco company, said it may someday phase out traditional cigarettes in favor of the reduced-risk products.
But high profitability in developing countries is likely to keep cigarettes on the shelves far into the future, experts say. And doubts surrounding e-cigarette manufacturers’ safety claims have launched efforts to reduce their availability to minors, trimming the target market for such products.
“The future is very bright for traditional cigarettes,” Heather Wipfli, the associate director for the University of Southern California Institute for Global Health, told The Christian Science Monitor in late November. “I think there is no expectation that traditional cigarettes are going away anytime in our lifetime, or anytime in the foreseeable future.”
Tobacco giants join forces in $49 billion mega merger
Two of the world's biggest cigarette companies are being rolled into one.
British American Tobacco (BTI) said Tuesday that it's agreed to pay $49.4 billion to take control of Reynolds American (RAI), the No. 2 U.S. tobacco company.
The two cigarette giants hold some of the biggest selling brands on the planet, including Pall Mall, Camel and Newport. Bringing them together would create the world's largest listed tobacco company by net sales and operating profit, according to BAT.
It already owns about 42% of Reynolds and launched a $47 billion bid in October to buy the remaining 58%. But it had to go higher to win the approval of Reynolds' directors.
The new cash-and-stock offer of $59.64 per Reynolds share is about 26% above the price the stock closed at before the original offer in October. If shareholders and regulators approve the deal, the two companies expect it to go through in the third quarter of this year.
Their existing strong ties means they already share some brands. For example, Reynolds has the rights to Pall Mall in the U.S., and BAT has them for more than 100 international markets.
The deal will also enable the two firms to pool their resources in the growing industry for next-generation tobacco products, like e-cigarettes.
Based in Winston-Salem, N.C., Reynolds made headlines last year for bringing in John Boehner, the heavy smoking former House speaker, as a director.