British American Tobacco to merge with Reynolds

Maxine SotoJan 18, 2017

The mega-merger comes after months of talks between the pair and sees BAT, which already owns 42.2% of Reynolds, unveil a higher offer of 59.64 U.S. dollars (£49.27) a share for the remaining 57.8% of the company.

Both companies were in talks about a potential deal in October, but Reynolds, known for selling Camel and Newport cigarettes, initially rejected it, Reuters reported.

The $49 billion takeover was agreed on improved terms compared with an initial bid made previous year.

On the other hand, they would be able to market Reynolds' brands like Newport, Camel and Pall Mall in developing economies, where antismoking campaigns are not as strong as in the US and Europe.

America is the second-largest cigarette market after China and the deal will enable BAT to consolidate its business in the lucrative market where Reynolds already has 35 percent market share.

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Still, the United States remains the most profitable tobacco market in the world, except for China, according to BAT, and Reynolds is the No. 2 player in the market, after Altria's Philip Morris USA, with a 34% share. Or at least not threaten USA workers, according to the executive.

Durante said there was a clear rationale to bring the groups together, and an alignment in their relative trading multiples made an agreement possible.

The brokerage retained its Hold rating on Reynolds American shares.

"We have been shareholders in Reynolds since 2004 and we have benefited from the success of the present management team's strategy, including its acquisition of Lorillard, which we supported with our own investment in 2015".

The new deal makes BAT the largest tobacco company in the world.

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Herzog said BAT's timing remains "opportune given its ambitions in vapor, which could benefit from Reynolds' momentum with Vuse Vibe in the US and promising heat-not-burn Core platform in Japan".

Stephen Pope, managing partner with Spotlight Ideas of London, said the recent drop of the pound versus the US dollar may have played a role in BAT's decision to up its offer.

BAT said it had agreed a $25 billion facility with a consortium of banks.

The combined company will result in annual savings of about $400 million.

"This is really a strategic combination", Cameron said. Cowen and Company reiterated an "outperform" rating and set a $57.00 price objective on shares of Reynolds American in a research report on Saturday, October 22nd.

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