LONDONand WINSTON-SALEM, N.C. – The announcement of British American Tobacco buying the remaining shares of Reynolds American that it doesn’t already own came as no surprise, considering the two companies’ public confirmation of talks. But analysts see the move as largely beneficial for the new global entity, with more consolidation to come.
In that light, Richmond, Va.-based Altria Group’s announced purchase of premium cigarette and cigar maker Nat Sherman, New York, seems to fall in line with that consolidation trend. (For more on that announcement, click here.)
As for London-based BAT and Winston-Salem, N.C.-based Reynolds, the two agreed that BAT would acquire the remaining 57.8% of Reynolds that it does not already own for $49.4 billion, as reported in a McLane/CSP Daily News Flash. For each Reynolds share, Reynolds shareholders will receive $29.44 in cash and 0.5260 BAT ordinary shares. This represents a premium of 26% over the closing price of Reynolds common stock Oct. 20, 2016, the last day prior to BAT’s announcement of a proposal to merge with Reynolds.
The combined company will provide a balanced presence in emerging and developed markets, with direct access for BAT to the U.S. market. The move creates a portfolio of global brands, bringing together ownership of Newport, Kent and Pall Mall, and a global next-generation products (NGP) business with a pipeline of vapor and tobacco heating products.
While believing consolidation is an overall trend, John C. Strickland Jr., president of Wayne Oil Co., Goldsboro, N.C., said that from a customer-facing perspective, little will change.
“What I see … is companies strengthening their balance sheets by acquiring within the tobacco realm but not in their ‘core’ area, so to speak,” Strickland told CSP Daily News. “BAT is a global entity, and this will give them a stronger presence in the United States.”
Calling the deal “positive with limited downside,” Bonnie Herzog, managing director of beverage, tobacco and convenience-store research for Wells Fargo Securities LLC, New York, gave four reasons to be upbeat about the deal:
- The revised offer reflects BAT/RAI’s global potential to compete in reduced risk products (RRPs) including procurement, research and development, and other cost considerations.
- The deal will be approved relatively quickly given the companies’ existing close relationship and lack of geographic overlap and antitrust risk.
- The deal increases the likelihood of New York-based Philip Morris International acquiring Altria as scale becomes increasingly critical amid continued industry consolidation.
- BAT’s timing is opportune given its ambitions in vapor and RRPs, which could benefit from RAI’s momentum with Vuse Vibe in the United States and its promising heat-not-burn Core platform in Japan.
Citing details from a recent BAT-Reynolds investor call, Nik Modi, managing director of tobacco, household products and beverages for RBC Capital Markets, New York, expects the deal to achieve $400 million in cost synergies over three years by leveraging scale, increasing efficiencies and aligning RAI with BAT’s operating model.
In recent newsletters, Modi said Republican victories in the last election could improve Reynold’s tax situation and muddy ongoing negotiations, if not delay them altogether. But that does not appear to be the case. In the end, the companies closed the deal by postponing the tax discussion, Modi reported.
The transaction has been unanimously approved by the transaction committee of independent Reynolds directors established to evaluate the BAT offer, as well as the Reynolds and BAT boards.
The companies have agreed that three of the non-BAT-nominated Reynolds directors will join the board of BAT when the deal closes, which is expected to occur during the third quarter of this year.
BAT or Reynolds will pay a $1 billion breakup fee under certain circumstances. If the companies do not obtain certain antitrust approvals or BAT does not accept conditional antitrust approvals, it must pay an antitrust breakup fee of $500 million to Reynolds instead of the $1 billion breakup fee.
Reynolds American Inc. is the parent company of R.J. Reynolds Tobacco Co., Santa Fe Natural Tobacco Co. Inc., American Snuff Co. LLC, Niconovum USA Inc., Niconovum AB and R.J. Reynolds Vapor Co. U.S. cigarette brands include Newport, Camel, Pall Mall and Santa Fe; smokeless tobacco brands include Grizzly and Kodiak; and electronic-cigarette brands include Vuse.
London-based BAT is a global tobacco group with more than 200 brands sold in more than 200 markets. International cigarette brands include Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans.
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