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Reynolds American : , BAT reach $49.4 billion deal board accepts increased BAT offer of $49.4 billion BAT raises offer by $2.4B to acquire remaining portion of

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01/18/2017 | 10:08am CET

Reynolds American Inc.'s board of directors on Tuesday accepted British American Tobacco PLC's $49.4 billion megaoffer, another iconic local company bought by a larger global rival.

Getting Reynolds to accept the deal required British American Tobacco, or BAT, for short, to raise its offer by another $2.4 billion - raising the value of the deal to $49.4 billion - for the remaining 57.8 percent of Reynolds that BAT did not already own.

The deal is projected to close in the third quarter. There is a $1 billion breakup fee for each company.

Reynolds American shareholders would own 19 percent of BAT, which would become the world's largest publicly traded tobacco manufacturer. Reynolds would be BAT's largest subsidiary.

"This is an agreement that offers a compelling premium to shareholders, as well as continued ownership in a company that is well-positioned for long-term success," said Lionel Nowell III, the lead independent director of Reynolds' board.

Susan Cameron, who returned as the board's executive chairwoman on Jan. 1, said Reynolds would keep its headquarters in Winston-Salem, similar to how the Brown & Williamson tobacco company operated in Louisville, Ky., when it became a U.S. subsidiary of BAT.

Cameron served as Brown & Williamson's chief executive before joining Reynolds in the same role in July 2004 after Reynolds' $4.4 billion purchase of Brown & Williamson.

Cameron confirmed Tuesday that she will remain as chairwoman, transitioning to a nonexecutive role on April 1, until the deal is completed.

Nicando Durante, BAT's chief executive, stressed that the company "has a strong track record of successfully integrating acquisitions and remains committed to Reynolds American's U.S. workforce and manufacturing facilities."

Tobaccoville plant

BAT said its manufacturing "would be enhanced by the inclusion of Reynolds' high-quality production facility in Tobaccoville." Reynolds is estimated to have about 2,000 local employees, the majority of whom work at the Tobaccoville plant.

BAT said the cost synergies for the deal would be "relatively modest at $400 million," which could signal limited impact locally beyond back-office and regulatory-oriented positions.

Cameron said the deal "is strategic in creating the world's largest tobacco manufacturer with multiple iconic tobacco brands and a world-class pipeline of next-generation vapor and tobacco-heating products."

"Through the transition, we form an industry leader that will focus on innovation and brand building," he said. "It hits the sweet spot and brings tremendous value for shareholders for both companies with a more diversified profit pool."

The absence of BAT from the U.S. market since 2004 is expected to be a key factor in a potentially smooth regulatory review of its proposed offer. The companies are projecting a four- to five-month review period with the U.S. Securities and Exchange Commission.

The new offer represents a 26.4 percent premium in the price of the stock, up from the 20 percent premium BAT initially proposed Oct. 20. Reynolds' board turned down that offer in mid-November, the Winston-Salem Journal reported, along with multiple British and U.S. media sources.

Analysts remained optimistic that BAT would increase its offer - and that Reynolds' board would accept - given how rapidly the global tobacco industry appears to be consolidating.

Tyler Tubbs, an analyst with Olivetree Financial Ltd. of London, said BAT "certainly has not overpaid for Reynolds and the acquirer now has a genuine fundamental story ahead of it."

Durante said he believes the BAT-Reynolds combination "has a very compelling strategic and financial logic that will provide a lasting benefit to shareholders, employees and all other stakeholders."

"It offers a balanced presence in high-growth emerging markets and high-profitability developed markets," the CEO said.

'Sweet spot'

BAT valued its initial offer at $24.13 in cash and $32.37 in BAT shares, or $56.50 overall.

The accepted offer is valued at $29.44 in cash and $30.20 in BAT shares, or $59.64 overall.

Durante also used the term "sweet spot" in discussing the reasoning for raising the cash portion of the deal.

"We couldn't go further (in cash) because we want to keep our credit rating ... near where we have it now," he said. The company plans to take on $25 billion in debt to help pay for the deal.

"The new offer reached where the Reynolds board thought the offer should be," Durante said.

BAT said it would continue its dividend policy of a minimum annual payout ratio of 65 percent.

By comparison, Reynolds' dividend payout has fluctuated between 75 percent and 80 percent in recent years.

Last week, Wells Fargo Securities analyst Bonnie Herzog issued an update after British media reported that negotiations had hit a snag over the Core heat-not-burn technology.

"While we would expect some discussion of Reynolds' newly reintroduced heat-not-burn platform and possible synergies with BAT's existing heat-not-burn 'glo' platform, we have no reason to believe it would be a deal-breaker in and of itself, as we believe BAT's interest in Reynolds is driven by bigger potential positives," Herzog said.

Those include BAT gaining a major U.S. market share, acquiring Reynolds' cash flow and enlarging its presence as the top global publicly traded tobacco manufacturer.

"This deal provides BAT with full ownership of the lucrative U.S. market, complementing its existing presence in high-growth emerging markets," Herzog said.

"There are significant synergies/cost savings above the original $400 million synergy target."

rcraver@wsjournal.com (336) 727-7376 @rcraverWSJ

© © Copyright 2017, Winston-Salem Journal, Winston-Salem, NC, source Newspapers

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Financials ($)
Sales 2016 12 474 M
EBIT 2016 5 822 M
Net income 2016 2 847 M
Debt 2016 11 337 M
Yield 2016 3,06%
P/E ratio 2016 13,43
P/E ratio 2017 23,00
EV / Sales 2016 7,54x
EV / Sales 2017 7,24x
Capitalization 82 696 M
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Reynolds American, Inc. Technical Analysis Chart | RAI | US7617131062 | 4-Traders
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Mean consensus OUTPERFORM
Number of Analysts 11
Average target price 55,4 $
Spread / Average Target -4,5%
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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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