British American Tobacco Offers to Buy Reynolds American

British American Tobacco Offers to Buy Reynolds American

- in World Biz

Reynolds American holds the rights to the Natural American Spirit brand of cigarettes in the United States.

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LONDON — British American Tobacco said on Friday that it had made a nonbinding offer to buy the remaining 57.8 percent of Reynolds American that it does not already own in a cash-and-share deal worth $47 billion.

The deal would create the world’s largest publicly traded tobacco business based on net sales and combine companies, with brands that include Camel, Lucky Strike, Newport and Pall Mall. Besides a strong share of the market in the United States, the new company would have a significant presence in Africa, Asia, the Middle East and South America, British American Tobacco said.

The proposed takeover comes just over two years after Reynolds American agreed to acquire a smaller tobacco rival, Lorillard, for $27.4 billion and more than a decade after British American Tobacco merged its Brown & Williamson operations in the United States with R. J. Reynolds to form Reynolds American. The Lorillard deal was completed last year.

British American Tobacco, which already owns 42.2 percent of Reynolds American, said in a letter to the Reynolds American board that it had offered $56.50 a share in cash and shares, representing a 20 percent premium over Reynolds American’s closing price on Thursday.

Reynolds American shares closed at $47.17 on Thursday.

“We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the U.S. market,” Nicandro Durante, the British American Tobacco chief executive, said in a news release. “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.”

Next-generation products include e-cigarettes and vaping products that are an alternative to traditional cigarettes.

“Reynolds American has received a nonbinding proposal from British American Tobacco to acquire all remaining outstanding shares of R.A.I. stock,” a Reynolds American spokesman, David Howard, said. “R.A.I.’s board is reviewing the proposal and will respond in due course.”

Under the terms of the deal, for each share of Reynolds, investors would receive $24.13 in cash and 0.5502 shares of British American Tobacco.

The deal would equate to $20 billion in cash and about $47 billion in British American Tobacco shares. It would value Reynolds American at $81 billion based on market capitalization.

Shares of British American Tobacco rose more than three percent in early trading in London on Friday.

The transaction would be the latest shake-up in the global tobacco industry, which saw its biggest upheaval in years with the Reynolds American-Lorillard deal in 2014.

That deal required nearly a year of navigating regulatory hurdles, with the combined company selling several brands to win approval.

Reynolds American, based in Winston-Salem, N.C., is the parent company of R. J. Reynolds, the second-largest tobacco company in the United States, behind Altria Group. Reynolds’s brands include Camel and Newport, as well as the smokeless tobacco brands Grizzly and Kodiak. It also holds the rights to the cigarette brands Kent, Lucky Strike and Pall Mall in the United States.

It was formed in 2004, when R. J. Reynolds was combined with Brown & Williamson’s operations in the United States, but traces its roots to the founding of Lorillard in New York City in 1760 and R. J. Reynolds in North Carolina in 1875.

Reynolds American reported sales of $10.7 billion in 2015 and employs 5,600 people.

British American Tobacco said that it was required to publicly disclose the proposal promptly under United States securities laws, and that it had not yet negotiated with Reynolds as a result.

The transaction is subject to an endorsement by the independent directors of Reynolds and to approval by shareholders of both companies.

British American Tobacco said that it expected cost savings of about $400 million from the transaction, but that the exact figure would need to be verified by further discussions with Reynolds.

The Reynolds American transaction would probably not face the same kind of regulatory scrutiny as the Lorillard deal, as there is little overlap between the two companies.

Reynolds American primarily operates in the United States, while British American Tobacco’s focus is outside the country.

“We always expected this deal to happen eventually, but we are surprised by the timing,” Adam Spielman, a Citigroup analyst, said in a research note on Friday. “It is true that B.A.T. is doing this deal while borrowing rates are low, but it could have bought R.A.I. before R.A.I. bought Lorillard, when the share price was 57 percent lower.”

British American Tobacco, which is based in London, was founded in 1902 as a joint venture between the Imperial Tobacco Company and the American Tobacco Company.

It sells cigarettes and other tobacco products in a portfolio that includes more than 200 brands, including Dunhill and Rothmans, as well the Kent, Lucky Strike, and Pall Mall brands outside the United States. It reported revenue of 13.1 billion pounds in 2015, or about $16.1 billion at current exchange rates, and it employs more than 50,000 people.

On Friday, the company said that its revenue for the first nine months of the year increased by 10.2 percent based on current exchange rates.

Centerview Partners, Deutsche Bank and UBS, and the law firms Cravath, Swaine & Moore and Herbert Smith Freehills are advising British American Tobacco on the proposed transaction.

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