Reynolds American Enters Smokeless Tobacco Category Via Acquisition of Conwood
April 25 2006 - 8:48AM
PR Newswire (US)
$3.5 Billion Acquisition of Nation's No. 2 Company in Growing Moist
Snuff Category WINSTON-SALEM, N.C., April 25 /PRNewswire-FirstCall/
-- Reynolds American Inc. (NYSE:RAI) has agreed to acquire a
holding company that owns Conwood, the nation's second largest
manufacturer of smokeless tobacco products, for $3.5 billion. The
holding company is owned by business interests of the Pritzker
family. "Conwood provides us with a significant, strategic platform
within the growing moist snuff category that would have taken years
to build," said Susan M. Ivey, chairman and chief executive officer
of Reynolds American. "The moist snuff category has been growing at
4 percent to 5 percent for the past five years. Clearly, we're
excited by this unique opportunity to gain immediate scale and
strength in the category." Tom Pritzker, chairman and CEO of The
Pritzker Organization said: "We are very proud of what our team has
accomplished. Having achieved a strong position in the market, we
felt that a strategic buyer would be in the best position to
continue the growth of the company. In Reynolds American, we found
a management team that is both compatible with our management team
and, in our view, has the vision and capabilities to capitalize on
what we have achieved." Conwood, headquartered in Memphis, Tenn.,
had 2005 annual net sales of more than $450 million and operating
income of nearly $250 million, which represents an operating margin
of about 55 percent. Over the past five years, Conwood has
delivered very strong compound annual growth in net sales and
operating income of approximately 8 percent and 10 percent,
respectively. "This transaction is expected to be accretive to
earnings in both the short and long term, and enhances shareholder
value," said Dianne M. Neal, RAI's executive vice president of
finance and chief financial officer. "Conwood's strong growth and
high margins should make it an important driver of RAI's future
profitability." Conwood is the only company to compete in all five
segments of the U.S. smokeless tobacco industry, manufacturing
moist and dry snuff; and loose leaf, plug and twist chewing
tobaccos. Conwood holds the No. 1 or No. 2 position in every
segment of the smokeless tobacco market. Moist snuff accounts for
more than 70 percent of Conwood's sales, led by both its
premium-priced Kodiak brand and its rapidly growing value-priced
Grizzly brand. Conwood, which traces its roots back to the 1782
founding of the Garrett Snuff Company, operates seven facilities
and employs about 900 people in Tennessee, Kentucky and North
Carolina. Reynolds American is also the parent company of R.J.
Reynolds Tobacco Company; Santa Fe Natural Tobacco Company, Inc.;
R.J. Reynolds Global Products, Inc.; and Lane Limited. Conwood will
operate as a subsidiary of Reynolds American. Bill Rosson,
Conwood's chief executive officer, will report to Jeffrey A.
Eckmann, Reynolds American's executive vice president of strategy
and business development. Santa Fe Natural Tobacco Co., R.J.
Reynolds Global Products and Lane Limited also report to Eckmann.
"Conwood's management team has an excellent record of delivering
growth and building strong brands," said Eckmann. "They have
doubled their share of the moist snuff market over the last five
years. Their commitment to product innovation and brand building is
an excellent fit with the strategic direction of all of RAI's
operating companies," he said. Reynolds American will combine its
Lane Limited subsidiary with Conwood in order to consolidate and
drive the companies' portfolio of other tobacco products (OTP).
Lane markets a wide range of specialty tobacco products, including
cigars and little cigars; roll-your-own and pipe tobaccos; and
Dunhill and other premium international cigarettes. The
headquarters of the newly combined companies will be located in
Memphis, and full integration is expected to be completed by the
end of 2007. The transaction will require regulatory approval by
the Federal Trade Commission. The acquisition is expected to close
by the end of the second quarter. The transaction provides Reynolds
American with the opportunity to leverage its strong balance sheet
to create shareholder value. RAI will fund the acquisition with
$3.2 billion in new debt and $300 million in cash. The company has
received financing commitments from Lehman Brothers Inc. and
JPMorgan Chase Bank, N.A. for the debt necessary to complete the
transaction. Reynolds American said it does not plan to revise its
2006 earnings guidance or its year-end balance sheet forecast until
the transaction has closed and the company has had a period of time
to gain additional clarity on Conwood's potential contribution to
RAI current-year earnings. Reynolds American was advised on the
Conwood transaction by Lehman Brothers Inc. CONFERENCE CALL WEBCAST
TODAY Reynolds American will webcast a conference call to discuss
the acquisition of Conwood at 10 a.m. Eastern Time today (Tuesday,
April 25, 2006). The call will be available live online on a
listen-only basis. To register for the call, please visit the
"Investors" section of http://www.reynoldsamerican.com/. A replay
of the call will be available on the site for 30 days. Remarks made
during the conference call will be current at the time of the call
and will not be updated to reflect subsequent material
developments. Although news media representatives will not be
permitted to ask questions during the call, they are welcome to
monitor the remarks on a listen-only basis. Following the call,
media representatives may direct inquiries to Maura Payne at (336)
741-6996 or Jan Smith at (336) 741-6995. RISK FACTORS Statements
included in this news release that are not historical in nature are
forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Although RAI believes that these expectations are based on
reasonable assumptions, it can give no assurance that the
acquisition, if consummated, will be successful or that other
expectations will be realized. The consummation of the transaction
is subject to the satisfaction or waiver of all conditions to the
acquisition. Factors that could affect the future performance of
RAI following completion of the transaction, include: - the
substantial and increasing regulation and taxation of the tobacco
industry; - various legal actions, proceedings and claims relating
to the sale, distribution, manufacture, development, advertising,
marketing and claimed health effects of tobacco products that are
pending or may be instituted against RAI or its subsidiaries; - the
substantial payment obligations and limitations on the advertising
and marketing of cigarettes under the MSA and other state
settlement agreements; - the continuing decline in volume in the
domestic cigarette industry; - competition from other
manufacturers, including any new entrants in the marketplace; -
increased promotional activities by competitors and the growth of
deep- discount cigarette brands; - the success or failure of new
product innovations and acquisitions; - the responsiveness of both
the trade and consumers to new products, marketing strategies and
promotional programs; - the ability to realize the benefits and
synergies arising from the combination of RJR Tobacco and the U.S.
cigarette and tobacco business of B&W, and from the acquisition
of Conwood; - the ability to achieve efficiencies in manufacturing
and distribution operations without negatively affecting sales; -
the cost of tobacco leaf and other raw materials and other
commodities used in products, including future market pricing of
tobacco leaf which could adversely impact inventory valuations; -
the effect of market conditions on foreign currency exchange rate
risk, interest rate risk and the return on corporate cash; - the
effect of market conditions on the performance of pension assets or
any adverse effects of any new legislation or regulations changing
pension expense accounting or required pension funding levels; -
the rating of RAI's and RJR's securities; - any restrictive
covenants imposed under RAI's and RJR's debt agreements; - the
possibility of fire, violent weather and other disasters that may
adversely affect the manufacturing facilities; - any adverse
effects from the transition of the packaging operations formerly
conducted by RJR Packaging, LLC, a wholly owned subsidiary of RJR
Tobacco, to the buyers of RJR Packaging, LLC's businesses; - any
adverse effects arising out of the implementation of an SAP
enterprise business system in the third quarter of 2006; and - the
potential existence of significant deficiencies or material
weaknesses in internal controls over financial reporting that may
be identified during the performance of testing required under
Section 404 of the Sarbanes-Oxley Act of 2002. Due to these risks
and uncertainties, you are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date
of this news release. Except as provided by federal securities
laws, RAI is not required to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events or otherwise. Reynolds American Inc. (NYSE:RAI) is
the parent company of R.J. Reynolds Tobacco Company, Santa Fe
Natural Tobacco Company, Inc., Lane Limited and R.J. Reynolds
Global Products, Inc. R.J. Reynolds Tobacco Company, the second-
largest U.S. tobacco company, manufactures about one of every three
cigarettes sold in the country. The company's brands include five
of the 10 best-selling U.S. brands: Camel, Kool, Winston, Salem and
Doral. Santa Fe Natural Tobacco Company, Inc. manufactures Natural
American Spirit cigarettes and other tobacco products for U.S. and
international markets. Lane Limited manufactures several
roll-your-own, pipe tobacco and little cigar brands, and
distributes Dunhill tobacco products. R.J. Reynolds Global
Products, Inc. manufactures, sells and distributes American-blend
cigarettes and other tobacco products to a variety of customers
worldwide. Copies of RAI's news releases, annual reports, SEC
filings and other financial materials are available at
http://www.reynoldsamerican.com/. DATASOURCE: Reynolds American
Inc. CONTACT: Investor Relations, Ken Whitehurst, +1-336-741-0951,
or Media, Maura Payne, +1-336-741-6996, or Jan Smith,
+1-336-741-6995, all of Reynolds American Inc. Web site:
http://www.reynoldsamerican.com/
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