Reynolds American Sells Natural American Spirit Assets for $5 Billion

  • JT to buy Reynolds Natural American Spirit rights outside U.S.
  • Brand sees strong support from Japanese smokers: JT President

Japan Tobacco Inc. plans to buy international rights to Reynolds American Inc.’s Natural American Spirit division for about $5 billion as Asia’s largest listed cigarette-maker seeks growth amid a stagnating home market.

The deal is “an excellent opportunity” for JT to strengthen its tobacco sales growth, particularly in Japan, where Natural American Spirit has strong support from urban adult smokers, JT President Mitsuomi Koizumi said in a statement Tuesday. The all-cash transaction doesn’t include the brand’s U.S. operations, Winston-Salem, North Carolina-based Reynolds said in a separate statement.

“The deal makes sense for Japan Tobacco as it strengthens their portfolio and adds a premium brand that is popular with the younger smoker,” said Duncan Fox, an analyst with Bloomberg Intelligence. “They paid what they had to, to get a fast-growing asset."

Tokyo-based JT’s offer values Natural American Spirit at 286 times 2014 profit before income taxes, compared with the median of 13 times in 79 tobacco company deals over the past five years, according to data compiled by Bloomberg. This will be the former Japanese monopoly’s biggest acquisition since 2007 when it bought Gallaher Group Plc, maker of Benson & Hedges cigarettes in Europe for about $19 billion.

‘Win for Reynolds’

The deal comes after Reynolds, the second-largest U.S. tobacco company, completed its acquisition of Lorillard Inc. in June for about $25 billion, adding the Newport cigarette brand. JPMorgan Chase & Co. and Lazard Ltd. acted as financial advisers and Jones Day as the legal adviser to Reynolds. The Japanese company worked with law firm Freshfields Bruckhaus Deringer.

“The deal seems like a win-win for Reynolds,” said Erik Bloomquist, an analyst with Haitong Securities in London. “To develop the Natural American Spirit brand outside of the U.S. requires a big investment. This deal allows them to avoid that cost and pay down debt from the Lorillard transaction.”

Share Repurchases

The deal also may allow Reynolds to resume repurchasing shares earlier than expected. If Reynolds uses all of the proceeds from the sale to pay down debt, the company may reach its long-term targeted debt-to-earnings range in time to start repurchasing shares in 2017, Nik Modi, an analyst at RBC Capital Markets, said in a note Tuesday. That’s at least a year earlier than expected prior to the JT deal, Modi wrote.

Reynolds shares rose 0.7 percent to $43.71 at 12:48 p.m. in New York. JT fell 4 percent to 3,916 yen in Tokyo.

The Reynolds businesses that JT is acquiring had profit before income taxes of 2.1 billion yen ($17.5 million) and net sales of 17.6 billion yen in 2014, according to JT. The transaction is expected to be completed by early 2016, the company said. Bloomberg reported last week that the Japanese company was in talks to buy cigarette assets from Reynolds.

JT obtained its existing Winston and Camel cigarettes rights outside the U.S. from Reynolds when it acquired the non-U.S. tobacco assets of RJR Nabisco Holdings Corp in 1999.

JT has sped up acquisitions of brands and products abroad in the face of a shrinking population and a stagnating smoking rate at home. Koizumi said in February that 2015 would be JT’s “year of investments” with the focus on growing its tobacco businesses, a strategy that led to its withdrawal from drinks and vending machines. 

JT, 33 percent owned by the Japanese government, has ambitions to become the world’s No. 1 tobacco company, according to its website. It’s currently the fourth-largest cigarette maker by volume, according to data from Euromonitor International, behind the Chinese government’s monopoly, Philip Morris International Inc., and British American Tobacco Plc.

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