British tobacco giant offers to buy rest of Reynolds American it
doesn't already own
By Saabira Chaudhuri in London and Tripp Mickle in Atlanta
British American Tobacco PLC made a $47 billion offer to take
full control of Reynolds American Inc. -- a move that would create
the world's largest listed tobacco company by revenue and market
value, while highlighting the value the U.S. holds for a shrinking
global tobacco industry.
London-based BAT already owns 42.2% of Reynolds, and is offering
cash and 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 broached the offer with Reynolds
management before going directly to its board.
Reynolds, which is based in Winston-Salem, N.C., said Friday
that its board will evaluate the offer and respond. Analysts expect
negotiations between Reynolds and BAT will lead to a higher offer
price.
After years of distancing themselves from the U.S. because of
mounting civil suits, international tobacco companies are returning
as they confront declining cigarette volumes and expanding
regulations around the globe.
Last year Reynolds made its own acquisition, clinching Lorillard
Inc. after lengthy scrutiny by regulators. The $25 billion 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 Britain's Imperial Tobacco Group
PLC (now Imperial Brands PLC) for $7.1 billion.
Analysts say the elimination of No. 3 Lorillard has given
Reynolds and Altria Group Inc., the largest U.S. tobacco company by
revenue, more pricing power that can be used to offset declining
cigarette volumes. The two companies have more than 80% of the U.S.
cigarette market.
The U.S. also offers legal protections to the tobacco industry
that aren't available overseas. New requirements that cigarettes be
sold in packages without signature logos and colors have been
spreading in Europe and elsewhere. Thanks to free-speech rights
under the First Amendment, tobacco companies are protected from
such plain-packaging rules in the U.S.
The Lorillard deal also strengthened Reynolds's U.S. standing by
handing it one of the strongest cigarette brands in its home
market: Newport. The menthol brand, which accounted for almost all
of Lorillard's $7 billion in sales in 2014, has been building
market share as smokers under 30 years old increasingly opt for
minty-flavored cigarettes over traditional smokes.
Beyond tobacco, a combined BAT and Reynolds would also be the
world's largest player in so-called next-generation products --
largely e-cigarettes and other vaping products. The two companies
already collaborate on this front, last year announcing a
technology-sharing agreement for their vapor products.
BAT expects the acquisition to yield relatively modest cost
savings of $400 million.
The deal is unlikely to face antitrust issues because the two
companies compete in different markets, said Lawrence Hrebiniak, a
management professor at the Wharton School of the University of
Pennsylvania. "There is no [geographic] overlap of their respective
footprints, which will keep both U.S. and European sheriffs off
their backs."
BAT, the world's No. 2 publicly traded tobacco company by
volume, behind Philip Morris International Inc., owns such
cigarette brands as Dunhill, Lucky Strike and Pall Mall. Reynolds,
the world's No. 6 by volume, owns Camel and Newport. The U.K.
company has been a shareholder in Reynolds since the U.S. firm took
on its current form in 2004, and its stake accounts for a hefty
chunk of BAT's profits.
The announcement's timing took some by surprise, with Citigroup
analyst Adam Spielman noting that BAT could have bought Reynolds
before the Lorillard deal, when the stock was trading at less than
half its recent levels.
BAT Chief Executive Nicandro Durante said BAT's board regularly
reviews its Reynolds holdings 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' price-to-earnings ratios more in line.
That, coupled with low interest rates -- which makes it cheaper to
borrow money to fund a takeover -- helped inform BAT's thinking,
according to a person familiar with the transaction.
The U.K. company's shares ended down 2.9% in Friday trading,
after trading higher most of the London session. Reynolds rose 14%
to $53.78 in New York trading.
The deal will hinge on the approval of Reynolds's board --
excluding BAT's own nominees -- which is expected to appoint a
seven-person committee to consider the offer, according to a person
familiar with the matter. Five of the board's 14 members are BAT
nominees. BAT said the deal would also need support from 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 tied its hands.
BAT's offer comes at a moment of transition for Reynolds, which
earlier in the week said its chief executive, Susan Cameron, would
step down next year. A person familiar with BAT's thinking said its
representatives on Reynolds's board supported Ms. Cameron's
successor, Debra Crew, as heir apparent when the former PepsiCo
Inc. executive joined Reynolds two years ago.
BAT, with its more diversified geographic reach, has increased
its cigarette volumes. On Friday, it reported 6.2% growth in
revenue for the first nine months of the year excluding
foreign-exchange fluctuations and other effects, with cigarette
volumes up 0.9%.
A deal would mark a reversal for the global tobacco industry,
which split from the U.S. in the 2000s. In 2004, BAT merged U.S.
unit Brown & Williamson Tobacco Corp. with R.J. Reynolds
Tobacco Holdings Inc. in a $4.2 billion deal that created Reynolds
American. Four years later, Altria spun off its international
business as Philip Morris International., a move designed in part
to insulate the fast-growing, lucrative non-U.S. business from
American regulators.
BAT's move increases the likelihood that rival Philip Morris
could merge with Altria, Wells Fargo analyst Bonnie Herzog said in
a note. She said Philip Morris is unlikely to "idly sit by" as its
competitor bulks up and takes aim at the lucrative U.S. market.
Philip Morris and Altria spokesmen declined to comment.
--Natalia Drozdiak in Brussels contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and
Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
October 22, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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