British American Tobacco has offered to pay $47bn (£38bn) to take full control of Reynolds American in a deal that would create the world’s biggest tobacco company by revenue and profit.
The cash-plus-shares deal would see BAT plunge back into the US market after a 12-year absence and is also expected to yield benefits in the development of e-cigarettes and vapes.
BAT, whose brands include Lucky Strike and Rothmans, already owns 42.2% of Reynolds and is offering to buy the remainder of the firm, which traces its roots back to before the American war of independence.
The UK company said it was prepared to pay $56.50 a share, comprising $24.13 in cash and $32.37 in BAT shares.
BAT has owned a stake in Reynolds since 2004, when it merged its US subsidiary Brown & Williamson business with RJ Reynolds Tobacco in a deal that left it with no US presence bar its stake in the new business.
“From the moment Reynolds American was created in 2004, this was always the most likely outcome,” said Cenkos Securities analyst Rae Maile.
“The US marketplace is fundamentally very attractive and offers a source of sustainable profit growth over the medium term.”
The offer, structured as a merger, is worth 20% more than Reynolds’ closing price on 20 October and values the US company at £66bn. The combined firm would be valued at about £157bn.
BAT shares, up 30% this year, rose 2.3% to £49.13 and were the biggest gainers in the FTSE 100 index, helped by a strong trading update for the first nine months of the year.
Revenues were up 8.1% stripping out exchange-rate movements, while it sold 497bn cigarettes, 2.2% more than last year.
Speculation has been rife for months that BAT might decide to buy out Reynolds as tobacco companies jockey for position.
BAT said buying Reynolds, the number two US tobacco company after Philip Morris, would give it a leading position in the American market, the world’s second-biggest after China.
Reynolds has a 35% market share in the US, where it owns Pall Mall, the biggest US low-cost brand, Newport, the top-selling menthol cigarette, and Camel, a mid-market name that is the third-biggest seller in the US.
Nigel Driffield, professor of international business at Warwick Business School, said the deal was also “likely to lead to increased production of BAT’s UK brands in the US, with fewer exports to the US from the UK”.
BAT could produce its brands via Reynolds’ factory in Tobaccoville, North Carolina.
Another analyst, who asked not to be named, said that while smoking rates in the US are declining, it remains a market with huge growth potential.
Population growth means that while smoking rates are falling, the number of smokers has remained relatively constant at about 45m people, he said.
US cigarettes are also relatively cheap compared to prices in the UK, leaving scope for the company to boost profits by raising prices.
Reynolds is also very strong in menthol cigarettes thanks to its Newport brand, which is particularly popular with the fast-growing young Hispanic population, the analyst added.
A tie-up will also allow BAT and Reynolds to build on their existing technology-sharing partnership in e-cigarettes and vapes.
BAT will gain control of Reynolds’ Vuse brand, which it can combine with its own Vype brand to build share in a fragmented market for what Reynolds calls “cigalike” products.
The British firm said it expected cost savings of $400m from the deal, a relatively low figure for such a large merger because BAT’s lack of presence in the US means there is limited overlap in their businesses.
Nicandro Durante, BAT’s chief executive, said: “We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the US market. The proposed merger of our two great companies is the logical progression in our relationship and offers all shareholders a stake in a stronger, truly global tobacco and next generation products company.”
BAT said Reynolds shareholders would gain from the deal by holding shares in a bigger company with the clout to sell Reynolds’s brands round the world.
Guy Ellison, head of UK equities at Investec Wealth & Investment, said that while the timing of the move was a surprise, the strategic rationale made “perfect sense, pivoting BAT further towards the high value US market, consolidating some strong brands and Reynold’s position in next generation tobacco.”
This article was written by Sean FarrellRob Davies, for theguardian.com on Friday 21st October 2016 08.43 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010