BAT Takes Control of Reynolds for $49 Billion

Reynolds accepts a sweetened offer, creating the world’s largest listed tobacco company with such brands as Dunhill and Camel.
Matthew HellerJanuary 17, 2017
BAT Takes Control of Reynolds for $49 Billion

Reynolds American has accepted a sweetened, $49 billion offer to be taken over by British American Tobacco, creating the world’s largest listed tobacco company.

Reynolds rejected BAT’s initial $47 billion, or $56.50 a share, bid for 57.8% of the U.S. company it doesn’t already own. Under the terms of the deal announced Tuesday, BAT will pay $29.44 in cash and 0.5260 BAT shares for each Reynolds share, a 26% premium over the price of the stock the day before BAT’s first offer was made public.

The deal combines BAT’s Dunhill, Lucky Strike, and Pall Mall brands with Reynolds’s Camel and Newport cigarettes. Reynolds American was formed in 2004 when BAT merged its U.S. subsidiary Brown & Williamson with R.J. Reynolds.

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“Our combination with Reynolds will benefit from utilizing the best talent from both organizations,” BAT Chief Executive Nicandro Durante said in a news release. “It will creat a stronger, global tobacco and [next generation products] business with direct access for our products across the most attractive markets in the world.”

The number of Americans who smoke cigarettes is at an all-time low. According to the most recent U.S. government statistics, only 15% of U.S. adults smoked in 2015, compared to 21% a decade earlier.

But as The Financial Times reports, “Low pack prices, combined with relatively high disposable incomes and a growing market for e-cigarettes and vaporizers, have boosted profitability [in the U.S.], while worries about legal costs have abated.”

Durante described the U.S. market as “highly attractive” and the “world’s largest tobacco profit pool” outside of China, noting that BAT only needed to sell two packets of cigarettes in the U.S. to bring in the same net revenues as six packs in other developed markets and 13 packs in emerging markets.

“They already had billions tied up in Reynolds, now they will have billions more — but with full control of the company and its cash flows,” Steve Clayton, a fund manager at Hargreaves Lansdown, told the FT.

“The States is an attractive market, with good pricing dynamics, and BAT can also take Reynolds’ portfolio of new-generation tobacco products and sell them worldwide,” he added.