BAT Agrees to Pay $49 Billion to Take Full Control of Reynolds -- 3rd Update
January 17 2017 - 5:00AM
Dow Jones News
By Saabira Chaudhuri
LONDON-- British American Tobacco PLC on Tuesday said Reynolds
American Inc. had agreed to its sweetened acquisition offer of
$49.4 billion for the 57.8% of Reynolds that it doesn't already
own, a deal that will create the world's largest listed tobacco
company by revenue and market value.
The acquisition, which brings together brands like Newport,
Dunhill, Kent and Pall Mall and catapults BAT into a position of
strength, is expected to lead to more consolidation in the tobacco
market down the road as peers like Philip Morris International Inc.
and Altria Group Inc. struggle against their bigger rivals. The
deal gives BAT a strong No. 2 position in the U.S. with a 34% share
of the cigarette market, adding to its existing footprint in
emerging markets across South America, Africa, the Middle East and
Asia.
BAT is paying $29.44 in cash and 0.5260 of an ordinary share,
totaling $59.64, for each Reynolds share, valuing its U.S. peer at
more than $85 billion. The deal comes after BAT said in October
that it had made an offer for Reynolds valued at $56.50 a share, or
about $47 billion for the stake it didn't own.
After rising earlier, BAT shares were down 0.3% to GBP47.50
($57.25) in Tuesday trading in London. Reynolds shares were up 4%
to $55.97 in premarket trading in the U.S.
BAT and Reynolds have a longstanding relationship. The London
company has been a Reynolds shareholder since 2004, which had given
it access to the profitable U.S. market without having a direct
presence.
At the time BAT first announced its proposed offer, the company
was prevented by U.S. securities law from negotiating a deal before
making the offer public because of its 42.2% stake in Reynolds. In
most negotiated takeovers, the acquiring company completes its due
diligence ahead of announcing an offer. On a conference call with
analysts Tuesday, BAT Chief Executive Nicandro Durante said an
"open and constructive dialogue" since then led to the
agreement.
The U.S. market has come a long way since 1998, when a landmark
tobacco settlement hit cigarette makers with huge legal liabilities
that led to $200 billion in costs over the years. More recently,
tobacco companies have pushed through price hikes, and the
industry's steady dividends have lured investors amid low interest
rates. Follow-on litigation after the 1998 settlement hasn't been
as damaging as expected.
Tuesday, BAT highlighted the U.S.'s position as the largest
tobacco profit pool outside of China, with affordable pack prices,
high disposable income and a burgeoning market for e-cigarettes and
other alternative products combining to create opportunities for
growth.
The agreed price represents a premium of 26% over Reynolds's
closing price the day before BAT made its initial announcement in
October.
After BAT's initial offer, the British company gained access to
Reynolds's books, allowing it to learn more about factors like the
company's forecasts, regulatory concerns and its brand strategies,
according to a person familiar with the matter. That gave BAT the
confidence to raise its overall offer along with bumping up the
cash portion to 49% from 43%, according to this person.
More detailed information also led BAT to slightly increase its
cost-savings forecast to at least $400 million in three years, up
from the $400 million it reported as part of its initial
announcement in October, the person said.
Despite the prospect of the incoming Trump administration
pushing corporate tax cuts, Mr. Durante told analysts it had been
"impossible to consider the potential impact" of any change to the
U.S. tax code and that the deal was based on the "fundamentals of
both companies and the prospects of both companies."
BAT on Tuesday said emerging markets will make up 60% of the new
company's footprint by volume. Volumes have continued to climb
across parts of the developing world, bucking the trend seen in
developed markets and making these particularly lucrative for
cigarette companies. BAT said revenue per pack from emerging
markets has grown at more than twice the rate in developed ones
over the past five years.
Three new Reynolds shareholders--ones that haven't been
nominated by BAT--will join the company's board once the deal
closes, expected in the third quarter of 2017.
The deal is subject to a breakup fee of $1 billion payable by
either company should its board fail to recommend the transaction
to shareholders or withdraw its recommendation. BAT could be forced
to pay a $500 million breakup fee if antitrust authorities ask it
to sell assets it doesn't agree to.
Beyond tobacco, a combined BAT and Reynolds will also be the
world's largest player in so-called next-generation
products--largely e-cigarettes and other vaping products. BAT has
been pouring money into alternative products in recent years,
launching new heat-not-burn products in addition to its existing
e-cigarettes such as Vype. Reynolds sells an e-cigarette called
Vuse.
Denise Roland and Ben Dummett contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
January 17, 2017 05:45 ET (10:45 GMT)
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