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4-Traders Homepage  >  Equities  >  Nyse  >  Reynolds American, Inc.    RAI

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Reynolds American : BAT Agrees to Pay $49 Billion to Take Full Control of Reynolds -- 3rd Update

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01/17/2017 | 11:46am CET
By Saabira Chaudhuri 

LONDON-- British American Tobacco PLC on Tuesday said Reynolds American Inc. had agreed to its sweetened acquisition offer of $49.4 billion for the 57.8% of Reynolds that it doesn't already own, a deal that will create the world's largest listed tobacco company by revenue and market value.

The acquisition, which brings together brands like Newport, Dunhill, Kent and Pall Mall and catapults BAT into a position of strength, is expected to lead to more consolidation in the tobacco market down the road as peers like Philip Morris International Inc. and Altria Group Inc. struggle against their bigger rivals. The deal gives BAT a strong No. 2 position in the U.S. with a 34% share of the cigarette market, adding to its existing footprint in emerging markets across South America, Africa, the Middle East and Asia.

BAT is paying $29.44 in cash and 0.5260 of an ordinary share, totaling $59.64, for each Reynolds share, valuing its U.S. peer at more than $85 billion. The deal comes after BAT said in October that it had made an offer for Reynolds valued at $56.50 a share, or about $47 billion for the stake it didn't own.

After rising earlier, BAT shares were down 0.3% to GBP47.50 ($57.25) in Tuesday trading in London. Reynolds shares were up 4% to $55.97 in premarket trading in the U.S.

BAT and Reynolds have a longstanding relationship. The London company has been a Reynolds shareholder since 2004, which had given it access to the profitable U.S. market without having a direct presence.

At the time BAT first announced its proposed offer, the company was prevented by U.S. securities law from negotiating a deal before making the offer public because of its 42.2% stake in Reynolds. In most negotiated takeovers, the acquiring company completes its due diligence ahead of announcing an offer. On a conference call with analysts Tuesday, BAT Chief Executive Nicandro Durante said an "open and constructive dialogue" since then led to the agreement.

The U.S. market has come a long way since 1998, when a landmark tobacco settlement hit cigarette makers with huge legal liabilities that led to $200 billion in costs over the years. More recently, tobacco companies have pushed through price hikes, and the industry's steady dividends have lured investors amid low interest rates. Follow-on litigation after the 1998 settlement hasn't been as damaging as expected.

Tuesday, BAT highlighted the U.S.'s position as the largest tobacco profit pool outside of China, with affordable pack prices, high disposable income and a burgeoning market for e-cigarettes and other alternative products combining to create opportunities for growth.

The agreed price represents a premium of 26% over Reynolds's closing price the day before BAT made its initial announcement in October.

After BAT's initial offer, the British company gained access to Reynolds's books, allowing it to learn more about factors like the company's forecasts, regulatory concerns and its brand strategies, according to a person familiar with the matter. That gave BAT the confidence to raise its overall offer along with bumping up the cash portion to 49% from 43%, according to this person.

More detailed information also led BAT to slightly increase its cost-savings forecast to at least $400 million in three years, up from the $400 million it reported as part of its initial announcement in October, the person said.

Despite the prospect of the incoming Trump administration pushing corporate tax cuts, Mr. Durante told analysts it had been "impossible to consider the potential impact" of any change to the U.S. tax code and that the deal was based on the "fundamentals of both companies and the prospects of both companies."

BAT on Tuesday said emerging markets will make up 60% of the new company's footprint by volume. Volumes have continued to climb across parts of the developing world, bucking the trend seen in developed markets and making these particularly lucrative for cigarette companies. BAT said revenue per pack from emerging markets has grown at more than twice the rate in developed ones over the past five years.

Three new Reynolds shareholders--ones that haven't been nominated by BAT--will join the company's board once the deal closes, expected in the third quarter of 2017.

The deal is subject to a breakup fee of $1 billion payable by either company should its board fail to recommend the transaction to shareholders or withdraw its recommendation. BAT could be forced to pay a $500 million breakup fee if antitrust authorities ask it to sell assets it doesn't agree to.

Beyond tobacco, a combined BAT and Reynolds will also be the world's largest player in so-called next-generation products--largely e-cigarettes and other vaping products. BAT has been pouring money into alternative products in recent years, launching new heat-not-burn products in addition to its existing e-cigarettes such as Vype. Reynolds sells an e-cigarette called Vuse.

Denise Roland and Ben Dummett contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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Financials ($)
Sales 2016 12 470 M
EBIT 2016 5 822 M
Net income 2016 1 939 M
Debt 2016 11 337 M
Yield 2016 3,17%
P/E ratio 2016 12,96
P/E ratio 2017 22,13
EV / Sales 2016 7,31x
EV / Sales 2017 7,02x
Capitalization 79 801 M
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Mean consensus OUTPERFORM
Number of Analysts 11
Average target price 54,9 $
Spread / Average Target -1,9%
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Debra Ann Crew President, Chief Executive Officer & Director
Susan M. Cameron Executive Chairman
Andrew D. Gilchrist Chief Financial Officer & Executive Vice President
Nana Mensah Independent Director
Martin D. Feinstein Independent Non-Executive Director
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