BAT’s Reynolds offer seen as a smart growth move

Local analysts have welcomed British American Tobacco’s (BAT’s) $47bn bid to buy out the minority shareholders in US tobacco group Reynolds, which would increase BAT’s exposure to the US market and to highergrowth emerging markets in the Middle East, Asia and Africa.

BAT already owns 42.2% of Reynolds and has made a cash and share offer for the remaining shares at a 20% premium to the share price on October 20.

The deal would see BAT, which has a secondary listing on the JSE, become the world’s largest listed tobacco company with interests across all key markets. BAT’s brands include Dunhill, Lucky Strike and Pall Mall. Reynolds owns Camel and Newport.

Mergence Investment Managers portfolio manager Dirk Steyn said it would give BAT a roughly 50:50 split between emerging markets and developed markets.

“Increasing their exposure to the American market is attractive because of the higher margins. US markets are perceived to be resistant against higher regulations especially plain packaging, that are threatening most developed markets. Johann Rupert

The buyout “will also enable them to combine their next generation product portfolio where BAT and Reynolds are viewed as being behind the market leader, Philip Morris Tobacco”, said Steyn.

Cratos Capital senior analyst Ron Klipin said the decline in developed markets was driving consolidation in the global tobacco industry. “The deal will give BAT access to emerging markets such as the Middle East, Asia and Africa. Smoking is still a growth area in those territories.”

Kagiso Asset Management’s Dirk van Vlaanderen said that as cigarette volumes continued their structural decline in developed markets, tobacco companies were relying on higher pricing, cost cutting and