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 what it said would be the world's largest listed tobacco company by revenue and profit.

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 may 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 for $7.1 billion.

BAT expects the deal to lead to relatively modest cost synergies 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.

BAT shares were up 3.2% Friday morning.

Analysts have said Reynolds is perhaps the best-placed tobacco company in the U.S. given 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 board--outside of BAT's own nominees--which is expected to appoint a seven-person strong 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," said BAT Chief Executive Nicandro Durante. 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 analyst Adam 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.

Low interest rates have no doubt played a role in the timing of BAT's approach, but the deal has still taken some by surprise. Citi's Mr. Spielman noted that BAT could have bought Reynolds before it bought Lorillard, when shares were 57% lower.

Mr. 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.

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

 

(END) Dow Jones Newswires

October 21, 2016 04:49 ET (08:49 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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