BAT offers to buy US tobacco firm Reynolds

Maxine SotoOct 22, 2016

BAT Chief Executive Nicandro Durante said the deal would create the US market leader and the world's largest listed tobacco company by net turnover and operating profit. The $47 billion purchase price would include $20 billion in cash and $27 billion in BAT shares.

The FTSE 100 company has proposed paying $47bn (£39bn) for the 57.8% of the shares it does not already own in United States rival Reynolds.

Cravath Swaine & Moore and Herbert Smith Freehills (HSF) are advising FTSE 100 giant British American Tobacco (BAT) on its $47bn (£38.4bn) approach for Reynolds American.

He noted that Reynolds had further strengthened its business by acquiring Lorillard past year for $25 billion and that the combined companies would a "world-class pipeline" of e-cigarette and other vaping products.

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A governance agreement between the two companies requires backing from the Reynolds directors who weren't appointed by BAT, he said.

The stock increased 3.8 per cent in early London trade on Friday, giving it a market value of £93bn.

"BAT shares reversed their sharp gains to trade lower as arbitrage trades were going on, with BAT being sold off and Reynolds being snapped up on the back of the merger news", Jawaid Afsar, senior trader at Securequity, said. The British company has owned stakes in Reynolds since 2004.

The combined company would create a massive tobacco powerhouse with a market cap of over $170 billion. The company is ironically aiming to make $400m worth of cost-savings through the deal, which comprises assets such as Reynolds' production facility in Tobaccoville, North Carolina. All big tobacco firms are investing in e-cigarettes and other vapor-based products, to diversify.

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BAT expects the deal to lead to relatively modest cost savings of $400 million, but said the deal would give it a major position in the US tobacco market in addition to high-growth emerging markets across South America, Africa, the Middle East and Asia.

BAT has always been rumored to be interested in buying rival Imperial, but a deal to acquire Reynolds likely would take that off the table, at least for now.

"We expect this deal to go through quickly as there are no antitrust issues and the two boards are on friendly terms", said analysts at Citi. "The main reason for the deal is for BAT to be in the United States", a company spokeswoman told AFP, noting that the company did not have a direct presence there.

Nigel Driffield, professor of worldwide business, Warwick Business School: "The planned takeover of Reynolds by BAT represents the final step of a process that the two companies embarked on some time ago". BAT is being advised by Centerview, Deutsche Bank and UBS. Year-to-date revenue has risen by 8.1% at constant exchange rates, or 6.2% on an organic basis.

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