British American Tobacco Ltd. said Tuesday it has proposed a vapor-technology sharing and licensing agreement with Reynolds American Inc., a pivotal element of its expanded investment in Reynolds.

The companies expect to sign a definite agreement by Dec. 31, with the proposed technology sharing and licensing running through Dec. 31, 2022.

The agreement likely gives BAT access to Vuse, the top-selling U.S. electronic cigarette made by R.J. Reynolds Vapor Co. at plants in Winston-Salem and Kansas. Analysts expect BAT to distribute Vuse globally, saving Reynolds the immense expense of reestablishing a major global distribution chain.

Reynolds spokesman David Howard declined to speculate on whether the agreement would involve BAT providing global distribution and sale of Vuse.

Wells Fargo Securities analyst Bonnie Herzog said the proposed agreement 'should accelerate global e-cig innovation and distribution.'

'We believe this strategic framework could ultimately have a significant positive financial impact, particularly for Reynolds, since Reynolds' licensing arrangement with BAT allows Reynolds to participate in the global e-cig category, which we continue to anticipate will generate significant growth and profits,' Herzog said.

BAT also announced plans to buy 100 percent of the CHIC Group of Poland, an e-liquids production facility that makes e-cig brands Volish, P1, Provog, Cottien, LiQueen and Aromativ. BAT officials could not be immeditately reached to see if any of those products are vaporizers or are used in rechargeable refill cartridges.

BAT said the proposed agreement 'provides a framework for collaboration and mutual cross-licensing of the parties' vapor product technologies.' The collaboration includes joint research and development activities, as well as cooperation on regulatory, scientific and manufacturing issues relating to vapor products.

'This proposed technology-sharing agreement makes great business sense as we lead the transformation of the tobacco industry, allowing us to continue to deliver innovative, high-quality vapor products to adult tobacco consumers seeking smoke-free alternatives,' said Debra Crew, R.J. Reynolds' president and chief commercial officer.

Kingsley Wheaton, BAT's managing director of next generation products, said the companies had made 'two significant milestones to enhance our next-generation product business globally, further enabling us to meet the demands of today's consumer.'

The willingness to negotiate a next-generation vapor technology sharing agreement was a key element in BAT helping Reynolds finance its $29.25 billion megadeal for Lorillard Inc., which was completed June 12. Reynolds essentially gained Newport in the deal, the top-selling U.S. menthol brand and No. 2 traditional cigarette brand.

Pre-megadeal, BAT already owned 42 percent of Reynolds as part of Reynolds' $4.4 billion purchase of BAT subsidiary Brown & Williamson Tobacco Corp. in July 2004.

BAT spent $4.7 billion to buy enough new Reynolds stock to keep its ownership stake at 42 percent, while legacy Reynolds shareholders own 43 percent and legacy Lorillard shareholders own 15 percent of Reynolds.

Herzog said Reynolds and BAT are following the path of a vapor-technology agreement between Philip Morris USA and Philip Morris International.

However, MarkTen, the e-cig product of Philip Morris USA subsidiary NuMark, has struggled to gain traction in the United States with a fourth-place market share.

'By joining forces and leveraging each other's strengths, BAT and Reynolds will likely accelerate the pace of e-cig/vapor/reduced risk products' growth on a global basis, and importantly will be able to more successfully engage with regulators both in the U.S. and internationally,' Herzog said.

'Reynolds will likely leverage BAT's extensive international sales force, which will further accelerate global distribution of its ecig/vapor/reduced risk technology.'

Susan Cameron, Reynolds' chief executive, said when announcing the megadeal in July 2014 that BAT had 'expressed its confidence (in Reynolds) and put their money in, $4.7 billion.'

BAT could have pursued buying at least a majority ownership stake in Reynolds after a 10-year moratorium on buying more Reynolds stock ended on July 30, 2014.

'The governance agreement for Reynolds American precludes BAT from having any control over our business until they would own 100 percent of the stock,' Cameron said.

Cameron said she is 'very bullish about the combination of the research and development resources of both entities and the geographic and revenue-generating opportunities of that initiative.'

Nicandro Durante, BAT's chief executive, said in July 2014 that 'this strategic partnership will combine the experience and expertise of both companies to produce a world-class pipeline of next-generation products with global reach, better suited to meeting the emerging requirements of today's smokers,'

Durante told Bloomberg News in July 2014 when discussing a possible majority ownership in Reynolds that 'you would always go to the board; we'd never go to Reynolds with a hostile takeover. Reynolds' management agrees with us.'

'In five years' time, will I go for Reynolds? We look at it on yearly basis. Not only Reynolds, we look at all the investments in the world, we have a lot of minority stakes.'

The BAT-Reynolds vapor-technology sharing agreement has been the subject of a Reynolds shareholder lawsuit, which was dismissed by a N.C. Business Court judge but is under appeal.

The essence of the lawsuit is that legacy Reynolds shareholders would be shortchanged from a Reynolds revenue standpoint in the overall deal if BAT gained access to Vuse and other next-generation vapor technology without paying an additional price for the access.

Herzog predicts that combined e-cig ($1.5 billion) and vaporizers ($2 billion) will exceed $3.5 billion in sales in 2015, and overtake traditional cigarette sales by 2025.

'Given the vast size of the global combustible cigarette market, the long-term upside potential for reduced risk products is significant,' Herzog said.

'Overall, we believe the market continues to underestimate the long-term growth opportunities of the reduced risk category for the tobacco industry.'

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