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.
Reynolds said Friday that it acknowledges BAT's proposal and its
board will now evaluate the offer and respond. Reynolds paid a
roughly 40% premium to buy Lorillard Inc. last year, and analysts
expect negotiations between Reynolds and BAT ultimately will lead
to a higher offer price.
The combined company would also be the world's largest by
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 such as the
U.S. and Western Europe, as well as emerging markets such as
Russia, Turkey, Pakistan and Brazil.
BAT and Reynolds don't have overlapping footprints, however,
meaning a merger is unlikely to 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 BAT's 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 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 afternoon.
BAT expects the deal to lead to relatively modest cost savings
of $400 million, but said the deal would give it a major 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.
A merger would allow the companies to pool their research and
development in tobacco alternatives, widely seen as the next big
frontier for the tobacco industry. 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 two
companies already collaborate on this front, last year announcing a
technology-sharing agreement for their vapor products.
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.
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.
Merging with BAT--which has stronger revenue-growth prospects,
according to analysts--could brighten Reynolds's prospects now that
it has digested the Lorillard deal. The Winston-Salem, N.C.-based
company reported results that fell short of analyst estimates for
the quarter ended June 30.
Meanwhile, London-based BAT, with its more diversified
footprint, has successfully grown its 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 also said it was launching a new variant of Vype and
will test launch a new electronic tobacco-heating system called Glo
in December.
BAT has long been rumored to be interested in buying rival
Imperial, but a deal to acquire Reynolds likely would take that off
the table, at least for now. BAT 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 09:04 ET (13:04 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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