24.10.2016

A $47 billion transatlantic tobacco deal is in the works

British American Tobacco has offered to buy USA tobacco company Reynolds American Inc in a $47 billion deal that would bring together Newport, Kent and Pall Mall cigarettes in the world's biggest listed tobacco company. The tobacco industry heavyweight has left rivals for dead, and it's about to get even bigger after flagging plans to buy the rest of Reynolds American (RAI) for $47 billion (£38.4 billion).

The completion of last year's purchase by Reynolds of Lorillard, which gave it the popular Newport brand, and the current relative valuations of the two companies' shares were the main reasons the deal was resurrected in recent weeks, said three sources close to the situation. The $56.50 per share offer represents a almost 20% premium over RAI's Thursday closing price of $47.17.

"There is substantial overlap in the shareholder registers of our two companies", BAT Chief Executive Nicandro Durante, noted in his letter to Reynolds' board of director outlining the deal merits. The combined company would also be the world's largest by operating profit in both tobacco and so-called next-generation products-largely e-cigarettes and other vaping products. Due to United States securities laws, BAT was required to announce its proposal promptly after it was made to Reynolds management, and had therefore been unable to have prior negotiations regarding the deal. BAT said Reynolds shareholders would gain from the deal by holding shares in a bigger company with the clout to sell Reynolds's brands round the world.

The proposal represents an enterprise value of $93 billion for Reynolds. BAT is offering a higher multiple, and handing the majority independent shareholders of Reynolds a premium worth more than double the roughly $3 billion up-front value of the anticipated $400 million a year in savings - calculated after tax and on a conservative multiple of 10.

That deal upended and further consolidated the USA tobacco industry, prompting Reynolds to sell its Kool, Salem and Winston cigarette brands and Lorillard's Maverick to Imperial Tobacco Group PLC (now Imperial Brands PLC) for $7.1 billion. BAT shares, which reached a high of 51.35 pounds in July, were trading up 2.4 per cent at 49.20 pounds at 1308 GMT. The company has submitted a $47bn (£38bn) offer to buy the 58 per cent of United States rival Reynolds it does not already own, says the Financial Times. Cigarette use is declining steadily across the developed world; there is a continued risk of costly litigation against the tobacco industry over health problems caused by cigarettes; and ever-more stringent anti-smoking regulations are being rolled out in developed and developing countries. BAT was advised by Centerview, Deutsche Bank and UBS on the deal. It also comes only months after Britain instituted plain packaging rules for cigarettes.


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