British American Tobacco (BAT) yesterday agreed to pay almost US$50 billion for control of US peer Reynolds American in a move which targets the lucrative US market and the fast-growing e-cigarette sector.
BAT will purchase the 57.8 percent of Reynolds American that it does not already own, the group said, unveiling an improved cash-and-shares offer after Reynolds had rejected its previous US$47 billion bid.
The deal brings together a raft of global brands, including BAT products Lucky Strike, Rothmans and Kent, and Reynolds’ brands such as Newport, Camel and Pall Mall.
The transaction, if approved, will also create the world’s largest listed tobacco company, with a strong foothold in the US and a significant presence in high-growth markets including South America, the Middle East and Africa.
BAT added it would also create a “truly global” business for fast-growing next generation products (NGP) like e-cigarettes or vaping.
“We are very pleased to have reached an agreement with ... Reynolds and we look forward to putting the recommended offer to shareholders,” BAT chief executive Nicandro Durante said in the statement.
The blockbuster deal “will create a stronger, global tobacco and NGP business with direct access for our products across the most attractive markets in the world,” he added.
“We believe this will drive continued, sustainable profit growth and returns for shareholders long into the future,” he said.
Reynolds shareholders will receive US$29.44 in cash and 0.5260 BAT ordinary shares, under the terms of the transaction.
That represented an increase of 26 percent compared with the closing Reynolds share price on Oct. 20 last year, the day before BAT’s unsuccessful bid.
The offer comprises US$25 billion worth of BAT shares and US$24.4 billion in cash and values the entire Reynolds group at more than US$85 billion.
BAT forecasts that it will make at least US$400 million in annualized cost savings following the purchase, while the deal remains subject to shareholder and regulatory approvals.
The London-listed firm plans to expand further in the e-cigarette market — where it is already the largest international firm outside the US — adding Reynolds’ popular Vuse vapor brand to its portfolio.
Major global tobacco companies are smoking out emerging markets to offset sliding demand in Western Europe, where high taxes, public smoking bans and health worries have persuaded many people to give up or turn to e-cigarettes, battery-powered devices that heat a nicotine liquid.
Reynolds is the second-biggest player in the US market and has three out of the four top-selling cigarette brands.
Half of BAT’s sales are in developed nations and the rest in emerging markets, while it claims to sell its cigarette brands to one in eight of the world’s 1 billion smokers.
Shane MacGuill, head of tobacco at consultancy Euromonitor International, said that the deal was motivated by the lucrative US market.
“BAT and Reynolds American have a strong existing relationship and while cost savings will be relatively modest the full access this acquisition would give BAT to the US — a lucrative, consolidated market with high barriers to entry — meaning it makes eminent sense,” MacGuill said.
“BAT will be inheriting full control of strong brands such as Newport, Camel and the super-premium Natural American Spirit,” he said. “It will also gain the option to leverage Reynolds American’s emerging product platform in world markets.”
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