By Saabira Chaudhuri
LONDON-- British American Tobacco PLC made a $47 billion
takeover offer for the roughly 58% of American peer Reynolds
American Inc. that it doesn't already own--a move that would cement
the two cigarette giants' longstanding trans-Atlantic ties and
create the world's largest listed tobacco company by revenue and
market value.
BAT already owns 42.2% of Reynolds, and is offering cash and BAT
stock worth $56.50 a share for the rest of the company,
representing a roughly 20% premium to Reynolds's closing share
price Thursday. BAT said it hadn't had previous discussions with
Reynolds's management about the offer before going directly to its
board.
A representative for Reynolds didn't immediately respond to a
request for comment.
The combined company would be the world's largest by revenue and
operating profit in both tobacco and so-called next-generation
products--largely e-cigarettes and other vaping products. It would
have a sprawling footprint across developed markets as well as
emerging markets, such as Russia, Turkey, Pakistan and Brazil.
BAT and Reynolds don't have overlapping footprints, however,
meaning a merger might not face the sort of steep antitrust hurdles
typical of such large deals. The U.K. company has been a
shareholder in Reynolds since the U.S. firm was created in 2004,
and its stake accounts for a hefty chunk of its profits.
BAT, the world's No. 2 publicly traded tobacco company by
volume, behind Philip Morris International Inc., owns cigarette
brands including Dunhill, Lucky Strike and Pall Mall. Reynolds, the
world's No. 6 by volume, owns Camel and Newport.
The move comes after a wave of consolidation in the industry.
While the world's tobacco giants are still encumbered with years of
pending litigation and liabilities, the industry has enjoyed steady
returns and profits.
Last year, Reynolds completed its own $25 billion acquisition of
Lorillard Inc. after yearlong scrutiny by regulators. That deal
upended and further consolidated the U.S. 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.
The announcement's timing took some by surprise, with Citigroup
analyst Adam Spielman noting that BAT could have bought Reynolds
before it bought Lorillard, when shares were 57% lower.
BAT Chief Executive Nicandro Durante said BAT's board regularly
reviews the shares of Reynolds it doesn't already own and had
determined that "current unique industry and market conditions"
made now a good time for the acquisition.
BAT's shares have jumped 13% since Britain's June 23 vote to
leave the European Union, while Reynolds's have fallen about 7.5%,
bringing the companies' valuations measured by their
price-to-earnings ratios more in line. That, coupled with low
interest rates, helped inform BAT's thinking, according to a person
familiar with the transaction.
The U.K. company's shares were up 2.9% Friday morning.
BAT expects the deal to lead to relatively modest cost savings
of $400 million, but said the deal would give it a leading position
in the U.S. tobacco market in addition to high-growth emerging
markets across South America, Africa, the Middle East and Asia.
Analysts have said Reynolds is perhaps the best-placed tobacco
company in the U.S., given that its brands such as Newport and
Natural American Spirit are attractive to younger smokers, while
its fastest-growing brands are also its most profitable.
Both companies are investing heavily in tobacco alternatives.
BAT makes vaping, medicinal licensed products and tobacco heating
products with its Vype e-cigarettes, Voke nicotine inhaler and
iFuse, respectively. Reynolds also has its own e-cigarette product,
called Vuse.
The deal will hinge on the approval of Reynolds's board--outside
of BAT's own nominees--which is expected to appoint a seven-person
committee to consider the deal, according to a person familiar with
the matter. Five people on Reynolds's 14-member board are BAT
nominees. BAT said it also expects the deal to seek the approval of
the majority of Reynolds shareholders outside of its own stake.
Reynolds's top 10 shareholders own about 20% of BAT.
"We would have preferred to present this proposal to the board
of Reynolds confidentially," Mr. Durante said. U.S. regulations
require the company to announce the merger proposal promptly, which
BAT said left it unable to hold prior negotiations with Reynolds
regarding the merger.
Citigroup's Mr. Spielman said: "We expect this deal to go
through quickly as there are no antitrust issues and the two boards
are on friendly terms."
BAT's offer comes at a moment of transition for Reynolds, which
earlier this week said its chief executive, Susan Cameron, would
step down next year. The company has struggled with declining
tobacco volumes as well as slowing sales of e-cigarettes, although
the U.S. is still seen as an attractive market for tobacco
companies, with demand stronger than it has been in decades.
London-headquartered BAT, with its more diversified footprint,
has successfully grown cigarette volumes. On Friday, it reported
organic revenue growth for the first nine months of the year at
constant rates of exchange of 6.2%, with cigarette volumes up
0.9%.
BAT has long been rumored to be interested in buying rival
Imperial Brands PLC, but a deal to acquire Reynolds would likely
take that off the table at least for now. Chief Financial Officer
Ben Stevens in an interview earlier this year said he didn't expect
any major industry consolidation in the short to medium term.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
October 21, 2016 05:49 ET (09:49 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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