LONDON-- British American Tobacco’s bid for U.S. manufacturer Reynolds American may be a sign of what’s to come in the industry, as tobacco companies around the globe feel the pressure of increasing regulation, falling demand and alternative-delivery innovation.
British American Tobacco (BAT) faces challenges with increasing regulation and pressure from the competition to innovate, said financial researcher Alessandro Pasetti in an article for New York-based Seeking Alpha. Last week, BAT, which owns 42.2% of Reynolds, made a proposal to merge with Winston-Salem, N.C.-based Reynolds through the acquisition of the remaining 57.8% in the company for approximately $47 billion, $20 billion in cash and $27 billion in BAT shares.
Reynolds acknowledged that it has received the nonbinding proposal. In a statement, the board said it “will evaluate the offer from BAT and respond accordingly.”
The proposed merger is subject to endorsement of Reynolds’ independent directors and approval by BAT and Reynolds shareholders.
“The U.K.-based suitor doesn’t have many other options than chasing inorganic growth and precious cost synergies,” Pasetti said. “So, size matters and the price must be right.”
He said the same applies to other companies, naming Bristol, U.K.-based Imperial Tobacco, another tobacco maker that could be on the auction block as soon as this year.
Bonnie Herzog, managing director of beverage, tobacco and convenience-store research for Wells Fargo Securities LLC, New York, believes this deal, if consummated, would increase the likelihood that Philip Morris International Inc., New York, would merge with Altria Group Inc., Richmond, Va.
“A BAT/RAI combination would catapult BAT to become the largest listed global tobacco company in terms of sales and operating profit, give BAT full access to the lucrative U.S. market, and create the largest reduced-risk tobacco-products company,” she wrote in a research note. “As such, we don’t believe [Philip Morris International] would idly sit by and believe this increases the probability that [it] could acquire [Altria].”
Reynolds American is the parent company of R.J. Reynolds Tobacco Co., maker of Newport, Camel and Pall Mall cigarettes; Santa Fe Natural Tobacco Co. Inc., maker of Natural American Spirit products; American Snuff Co. LLC, maker of smokeless tobacco products such as Grizzly and Kodiak; Niconovum USA Inc. and Niconovum AB, which market nicotine-replacement therapy products in the United States and Sweden; and R.J. Reynolds Vapor Co., marketer of Vuse digital-vapor cigarettes.
BAT values Reynolds at $56.50 per share, of which $24.13 would be in cash and $32.37 would be in BAT shares. It represents a premium of 20% over the closing price of Reynolds common stock on Oct. 20, 2016.
“We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the U.S. market,” BAT CEO Nicandro Durante said. “The acquisition of Lorillard in 2015 has further strengthened Reynolds’ business. The proposed merger of our two great companies is the logical progression in our relationship.”
U.S. securities laws required BAT to announce its merger proposal promptly after it made it to the Reynolds board.
Based in London, BAT is a global tobacco group with more than 200 brands sold in more than 200 markets. Its brands include Dunhill, Lucky Strike, Kent and Pall Mall, Kool, Benson & Hedges and Rothmans.
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