BAT raises offer for Reynolds
• JSE-listed British American Tobacco revises bid and agrees to pay $49bn to take control of US cigarette maker
Cigarette giant British American Tobacco (BAT) has increased the price tag to buy out associate company Reynolds, but firmly believes that the $49bn deal will enhance the enlarged group’s ability to bolster margins and grow earnings.
On Tuesday, BAT, which already owns a 42% stake in Reynolds, outlined revised terms of the takeover, pitching a sweeter cash and scrip settlement. The revised offer will see Reynolds shareholders receiving a cash settlement of $29.44 per share in cash as well as a scrip settlement in the form of BAT American depository receipts listed on the New York Stock Exchange. The settlement implies a value of $59.64 per Reynolds share, a marked increase on BAT’s opening bid of $56.50 per share. The offer price represents a 26% premium on Reynold’s closing share price on October 20 2016, and gives the company an enterprise value of close to $100bn.
BAT is the second-largest company on the JSE with a market capitalisation of about R1.586-trillion. Both companies’ boards have given the transaction the thumbs up.
BAT CEO Nicandro Durante said the deal would create the largest and “most international” tobacco company in the world. Reynolds is the second-largest player in the US with a 34% market share in cigarettes. BAT holds key positions in emerging markets across South America, Africa, the Middle East and Asia.
He said 60% of the enlarged company’s volumes — which includes brands like Kent, Pall Mall, Lucky Strike, Camel and Newport — would still be generated in emerging markets.
“We have seen developed markets as a source of current profit growth, and emerging markets as future growth. Nothing has changed.”
BAT financial director Ben Stevens said strong cash flow generation would reduce the net debt-profit ratio from a full year pro forma ratio of about four times to a target of about three times by 2019.
One analyst at the BAT conference call suggested the takeover was driven by new generation products (electronic cigarettes and vapes) rather than combustibles (traditional tobacco products).
Durante discounted this, saying the deal made sense for both companies in all areas. “It’s winwin for shareholders in both firms. The deal was not made on any specific area … we will be stronger in all categories.”
Responding to analysts’ questions about margin enhancement for the enlarged group, Stevens said BAT’s aspirations were still to grow operating margins by 50 to 100 basis points over the longer term.
Durante said the main three synergies that would stem from the Reynolds deal were in procurement, product development and head office roles.
“But most synergies will come from procurement.”
BAT initially estimated annualised cost savings of at least $400m at the end of the third year after the takeover.
Stevens said there was now a lot more certainty regarding estimated cost savings after BAT had been able to look more closely at Reynolds’ operations. “Hopefully, as we work more closely with Reynolds, we might see more cost savings.”