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, 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 2.8% to GBP46.30 in
Tuesday trading in London. Reynolds shares were up 3.6% to $58 in
morning 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.
BAT Tuesday 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.
In a subsequent Reynolds American call with analysts Tuesday,
Executive Chairman Susan Cameron said the equity component of the
deal would allow Reynolds shareholders to benefit from any profit
gains in the U.S. while gaining new exposure to faster-growing
emerging markets in South America, the Middle East, Asia and
Africa.
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."
Reynolds's board considered the potential tax change, Ms.
Cameron said. "Our view is that you cannot structure a deal around
speculation. There is no timetable for resolution of any of these
kinds of issues," she said.
BAT 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.
Centerview Partners, Deutsche Bank AG and UBS AG are advising
BAT. Weil, Gotshal & Manges LLP and Moore & Van Allen PLLC
are lawyers for Reynolds American's transaction committee and
Goldman Sachs Group Inc. is its financial adviser. Jones Day is
legal counsel for Reynolds American and J.P. Morgan Chase & Co.
and Lazard are financial advisers to the company.
--Denise Roland, Ben Dummett and Jennifer Maloney contributed to
this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
January 17, 2017 10:15 ET (15:15 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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