BAT Wins Reynolds With Sweetened $49.4 Billion Buyout Bid

  • U.K. company raises offer to $59.64 a share in cash and stock
  • Deal creates world’s largest publicly traded tobacco company

British American Tobacco Plc reached agreement to buy full control of Reynolds American Inc. with a sweetened $49.4 billion offer, bringing a successful end to almost three months of bartering with the maker of Camel cigarettes.

BAT increased the cash element of a cash-and-share bid for the 58 percent of Reynolds that it doesn’t already own. The new offer values each Reynolds share at $59.64, the London-based maker of Dunhill and Lucky Strike said Tuesday, about 5.6 percent more than the $56.50 it proposed on Oct. 21.

Hammering out the terms of an improved deal has been a slow process for the cigarette makers, complicated by uncertainty created by Donald Trump’s election. With agreement in place, the companies can move forward with a combination that marks the latest stage in a wave of consolidation for the industry, which is struggling with shrinking demand for traditional cigarettes and an uncertain pathway to new, potentially less harmful products.

“The market will be relieved that they have got the deal over the line,” said Richard Marwood, a fund manager at Royal London Asset Management whose assets include BAT shares. “People were starting to worry that the negotiations might break down.”

The U.K. company said it’s offering $29.44 in cash and 0.526 of a BAT share for each Reynolds share, pushing the cash element up from $24.13. That values Reynolds at 16.9 times earnings before interest, tax, depreciation and amortization, BAT said, a higher multiple than for comparable industry deals, reflecting BAT’s desire to boost its standing in the race to replace traditional cigarettes with products such as Reynolds’s Vuse e-cigarette brand.

Breakup Fee

Analysts have said a possible corporate tax cut by President-elect Trump would also justify an increase in the bid, although BAT denied that played any role.

“BAT shareholders will be the happier of the two groups because they will be getting the potential benefits from a lower corporate tax rate,” said James Bushnell, an analyst at Exane BNP Paribas.

For more analysis on the deal from Gadfly, click here

Uncertainty over the tax rate is reflected in a breakup fee of $1 billion should either side pull out of the deal, Bushnell said. The transaction requires the approval of at least 50 percent of Reynolds shareholders in a vote that will exclude BAT.

BAT forecast a minimum of $400 million of annual cost synergies within three years. The U.K. company has gained confidence in the target and is studying ways to exceed it, Chief Financial Officer Ben Stevens said on a conference call.

Combined, the two companies would overtake Philip Morris International Inc., the maker of Marlboro, as the world’s largest publicly traded tobacco company by revenue. It would give the U.K. company an initial foothold in the U.S., which will account for about 35 percent of the combined group’s revenue, according to Bloomberg data.

BAT shares fell 1.7 percent to 4,679.5 pence at 1:15 p.m. in London. Reynolds shares rose about 4 percent to $58.25 in New York pre-market trading.

The combination could herald more tobacco-industry deals. Japan Tobacco Inc. buying Britain’s Imperial Brands Plc, and Philip Morris International Inc. re-merging with Altria Group Inc. eight years after splitting are the most plausible scenarios, experts say.

BAT said a committee of independent Reynolds directors unanimously approved the offer, which will boost the U.K. company’s earnings per share in the first year after completion, scheduled for the third quarter. The British company has held a stake in Winston-Salem, North Carolina-based Reynolds since the U.S. company was created in 2004, and the two tobacco giants are close partners on vapor technology innovation.

Centerview Partners, Deutsche Bank and UBS AG advised BAT on the deal, while JPMorgan Securities and Lazard acted for Reynolds.

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