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BAT agrees to buy Reynolds for $49 billion

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01/17/2017 | 07:28pm CET
FILE PHOTO -  Camel cigarettes are stacked on a shelf inside a tobacco store in New York

British American Tobacco (>> British American Tobacco plc) has agreed a $49.4 billion (39.91 billion pounds) takeover of U.S. rival Reynolds American Inc (>> Reynolds American, Inc.), creating the world's biggest listed tobacco company after it increased an earlier offer by more than $2 billion.

British American Tobacco (>> British American Tobacco plc) has agreed a $49.4 billion (39.91 billion pounds) takeover of U.S. rival Reynolds American Inc (>> Reynolds American, Inc.), creating the world's biggest listed tobacco company after it increased an earlier offer by more than $2 billion.

BAT, which already owned 42 percent of Reynolds, will pay $29.44 in cash and 0.5260 BAT shares for each Reynolds share, it said, a 26 percent premium over the price of the stock on Oct. 20, the day before BAT's first offer was made public.

Reynolds, the maker of Camel and Newport cigarettes, rejected an initial approach in November, although the two sides remained in talks.

The deal, which values the whole of Reynolds at around $86 billion, will mark the return of BAT to the lucrative and highly regulated U.S. market after a 12-year absence, making it the only tobacco giant with a leading presence in American and international markets.

BAT Chief Executive Nicandro Durante said bringing the two companies together would create a market leader with brands including Newport, Lucky Strike, Camel and Pall Mall.

"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," he said on Tuesday.

The U.S. tobacco market was the most profitable outside China, he said in an interview, and BAT "figured there was some room to grow there."

"We expect the great majority of Reynolds jobs to stay in tack," said Susan M. Cameron, executive chairman of Reynolds American's board of directors.

She said while some jobs would be eliminated because Reynolds is going from a publicly traded company to a subsidiary, there might be job creation in the United States. President-elect Donald Trump has repeatedly singled out and criticized U.S. companies for not doing more to keep jobs in the United States.

BAT left the United States in 2004 when it merged its subsidiary Brown & Williamson with R.J. Reynolds to form Reynolds American. A decade later, the U.S. group agreed to buy Lorillard in a $27.4 billion deal that added the Newport brand to its stable.

"I thought this was always going to happen, but the acquisition of Newport completed the picture for Reynolds," said Shane MacGuill, Head of Tobacco at Euromonitor International. "It rounded out their program, gave them a strong brand with growth potential."

Reynolds got Newport menthol cigarettes, one of the few U.S. brands that is gaining share in a shrinking market, as part of its deal with Lorillard Inc.

Durante said there was a clear rationale to bring the groups together, and an alignment in their relative trading multiples made an agreement possible.

"This is the right moment to make the deal; the multiples of BAT and Reynolds are closer than ever before," he said.

BAT would also be able to take Reynold's NGP portfolio, led by vaping brand Vuse, into its international markets, he said.

Debra A. Crew, Reynolds American's president and chief executive officer, said while the next generation products are currently only a small part of its business, they have enormous long-term potential. "More than half of smokers are interested in alternative products," she said. "The interest is there."


The takeover could spark further deals, analysts have said, as Philip Morris International (>> Philip Morris International Inc.) and Japan Tobacco (>> Japan Tobacco Inc) jostle for market share in an industry that is shrinking in the West as more people quit smoking.

"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 (>> Imperial Brands PLC), who look more and more like a minnow swimming in a tank of big, hungry fish," said Hargreaves Lansdown fund manager Steve Clayton.

Some have predicted the deal could encourage current market leader Philip Morris International to reunite with its U.S. affiliate Altria, reversing a 2008 spin-off.

Shares in BAT reversed early gains as investors fretted about the price BAT was paying and the debt it was taking on.

BAT said it had agreed on a $25 billion facility with a consortium of banks.

Its shares were down 3.5 percent at 45.97 pounds, below the level they were trading in October before it announced its approach. Reynolds' stock was trading up 3.4 percent at $57.88.

RBC Capital Markets said assuming BAT was able to achieve the annual cost savings of "at least $400 million" it has targeted, the deal would be financially neutral for BAT shares.

"We think (the deal) makes sense strategically and operationally and just about washes its face financially," it said. "That said, a value-neutral acquisition does little to alter our view that the shares are already reasonably valued."

BAT Fiance Director Ben Stevens told analysts the group now had a "lot more certainty" on the cost savings. "We hope that as we get closer to Reynolds we will find more cost savings than that," he said.

Centerview Partners, Deutsche Bank and UBS advised BAT on the deal, while Lazard, JP Morgan and Jones Day worked for Reynolds American.

(Reporting by Paul Sandle; Additional reporting by Jilian Mincer in New York; Editing by Mark Potter, Susan Thomas and Chris Reese)

By Paul Sandle

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Financials ( GBP)
Sales 2017 8 866 M
EBIT 2017 3 791 M
Net income 2017 1 891 M
Debt 2017 12 159 M
Yield 2017 4,75%
P/E ratio 2017 16,73
P/E ratio 2018 15,68
EV / Sales 2017 5,27x
EV / Sales 2018 5,09x
Capitalization 34 523 M
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Average target price 40,6  GBP
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Alison J. Cooper Chief Executive Officer & Executive Director
Mark D. Williamson Non-Executive Chairman
Oliver Reginald Tant Chief Financial Officer & Executive Director
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