BRITISH AMERICAN TOBACCO

$49.4bn mega-merger a game-changer in global tobacco industry

LONDON-based British American Tobacco’s (|BAT’s) $49.4 billion (R670bn) megamerger with Reynolds last week heralded a final act in industry consolidation and had created a serious global player in the growing vapour market, industry analysts said.

The analysts believe the deal is a game changer in the tobacco industry, and expect BAT’s main rivals, Altria and Philip Morris International (PMI) to follow suit.

The BAT deal made it the biggest listed tobacco company in the world.

Shane MacGuill, the head of tobacco at Euromonitor International, said the deal meant the US became the company’s largest market.

“The importance of this transaction for BAT lies in the fact that these are just not volumes, but US volumes. The US cigarette market is currently almost unnaturally robust with a contained secular decline trend,” MacGuill said. The company would now sell 94 billion cigarettes in the US. In 2015 the company had sold 63 billion cigarettes in Russia and 52 billion in Brazil.

He said one of the key triggers for the deal was Reynolds’ $25bn acquisition of menthol cigarettes company Lorillard in 2015. This saw Reynolds taking over the Newport brand.

Ruan Stander, a portfolio manager at Allan Gray, said while the asking price was large, many factors made the deal make financial sense to BAT shareholders, including the focus on next-generation products.

“The price is full, but given Reynolds owns a portfolio of growing brands in a country with low cigarette prices relative to income, I don’t think BAT are overpaying. Both companies own compelling intellectual property, but the transaction will make it possible to co-operate fully on next-generation products at a global scale.”

Last year, market research company Research and Markets said the global vapour products market would be worth an estimated $32bn by 2021. North America accounted for 40 percent of the market in 2015.

MacGuill said the growing vapour market was an extra incentive for BAT and established it as a predominant global player. “It creates the first engine for development of next-generation products spanning all three of the category’s key markets – the US, UK and Japan,” he said.

Victor von Reiche, an equity analyst at Citadel, said the deal further consolidated the US cigarette market.

BAT shares closed 1.10 percent higher at R802.76 on the JSE yesterday.