BAT Bids $47 Billion for Full Ownership of Reynolds AmericanSam Chambers and Paul Jarvis
Deal would create largest publicly traded tobacco company
Reynolds, the maker of Camel cigarettes, sees shares surge
British American Tobacco Plc offered to pay $47 billion for full control of Reynolds American Inc., proposing a blockbuster trans-Atlantic deal that would create the world’s largest publicly traded tobacco company and put brands such as Lucky Strike and Camel under the same roof.
The unsolicited cash-and-stock offer of $56.50 a share, announced Friday, would allow London-based BAT to acquire the 58 percent of Reynolds that it doesn’t already own. But the U.K. company only plans to pursue the transaction with the support of Reynolds. The two sides haven’t yet held negotiations, BAT said, and the Reynolds board is just now reviewing the offer.
BAT and Reynolds' close links
- British American Tobacco has held a 42 percent stake in Reynolds American since 2004.
- BAT has appointed five representatives to Reynolds' board, although none of them will be involved in the decision-making process of the deal.
- Two BAT executives and three former executives serve on the board of Reynolds.
- Susan Cameron, President and Chief Executive Office of Reynolds, previously held the same position at BAT subsidiary Brown & Williamson.
- Reynolds' largest brands include Camel and Newport, while BAT sells Dunhill and Lucky Strike.
The move renews the merger frenzy of a fast-consolidating tobacco industry, where companies are fighting for market share and scrambling to develop alternatives to traditional cigarettes. For BAT, the idea is to get a bigger foothold in the U.S. and capitalize on Reynolds’s leadership in electronic cigarettes. The acquisition also would be the biggest transaction by a U.K. company since the nation voted in a June 23 referendum to leave the European Union.
“The timing is a surprise, but the strategic rationale makes perfect sense, pivoting BAT further towards the high-value U.S. market,” said Guy Ellison, head of U.K. equities at Investec Wealth & Investment. “The ball is now in the court of Reynolds’s board and shareholders.”
The bid represents about a 20 percent premium to Reynolds’s closing price, and its stock soared to close the gap on Friday. It was up 19 percent to $56.15 as of 9:34 a.m. on Friday in New York, valuing the company at $79.8 billion. BAT rose as much as 4.2 percent to 5,003 pence in London trading, boosting the company’s market value to 93.3 billion pounds ($114 billion).
BAT has held its current stake in Winston-Salem, North Carolina-based Reynolds since the U.S. company was created in 2004, and the two tobacco giants are already close partners. BAT estimates that the transaction would generate “relatively modest” cost synergies of about $400 million.
The proposed merger “is the logical progression in our relationship and offers all shareholders a stake in a stronger, truly global tobacco and next-generation products company,” BAT Chief Executive Officer Nicandro Durante said in a statement.
BAT shares, which have risen about 13 percent since the U.K.’s Brexit vote, make up about 57 percent of the proposed offer. That helps offset the increased expense of the cash portion, which was weakened by a drop in the value of sterling since the country’s decision to leave the EU. But the fallout from Brexit has helped in other ways: BAT gets the vast majority of its revenue in currencies other than the pound, so its international sales are now worth more when converted into sterling.
The planned combination would likely overtake Philip Morris International Inc., the maker of Marlboro, as the world’s largest publicly traded tobacco company. The biggest overall is China National Tobacco Corp., run by China’s State Tobacco Monopoly Administration. That business has a market share that’s about the size of BAT’s and Philip Morris’s combined, according to a report from the Brookings Institution.
BAT has been at the forefront of industry consolidation. The company spent about $2.4 billion on a buyout of its Brazilian Souza Cruz SA unit last year, and it previously part-funded Reynolds’s takeover of Lorillard Inc. -- a move that let BAT maintain its 42 percent stake in the maker of the Camel brand.
“In strategy terms, the key is simply scale,” said Jonathan Leinster, an analyst at Berenberg. “Reynolds American and BAT have a technology agreement and cooperate on many issues, so this is largely about taking control of a significant share of the world’s largest profit pool.”
The combined entity would generate 40 percent of its profits from the U.S., he said. BAT expects the transaction to add to earnings in the first full year after completion.
Including net debt, the bid values Reynolds at 16.3 times earnings before interest, tax, depreciation and amortization, BAT said. Buyers of tobacco companies over the past decade paid a multiple of 13.4 times profit on average, according to data compiled by Bloomberg.
BAT’s Durante wrote in a letter to the Reynolds board that he would have preferred to propose the takeover confidentially. But because BAT is a significant existing shareholder of the target, U.S. securities law would have required the bidder to immediately amend its regulatory filings to show it made the proposal.
A governance agreement between the two companies requires backing from the Reynolds directors who weren’t appointed by BAT, he said. The bid during a time of transition for Reynolds: Two days ago, the company named Debra Crew to succeed Susan Cameron as CEO next year. Cameron led the $25.9 billion acquisition of Lorillard, owner of the Newport menthol brand.
Separately, BAT reported a 6.2 percent increase in organic revenue for the first nine months of the year, with growth showing little change from the 6 percent pace of the opening half.
Under the terms of the proposal, Reynolds investors would get $24.13 in cash and 0.5502 BAT shares for each share. The cash component would be financed by a combination of existing cash resources, new bank credit lines and new bonds.
Centerview Partners, Deutsche Bank AG and UBS Group AG are BAT’s financial advisers, while Cravath, Swaine & Moore LLP and Herbert Smith Freehills LLP are dealing with legal matters.
“It’s a good time for BAT to be taking on that debt with interest rates so low,” said Duncan Fox, an analyst at Bloomberg Intelligence. “Given their cash generation, BAT can do this deal fairly comfortably.”