Bats makes $47bn offer for Reynolds

BRITISH American Tobacco (Bats) announced on Friday a $47 billion (R656bn) offer to acquire the remaining 57.8 percent of Reynolds American that it did not already own, in a move to cement the two cigarette giants and create the world’s largest listed tobacco company by revenue and market value.

The news lifted Bats’ share price by 4.65 percent on the JSE on Friday morning to R856.03 per share. However, the share closed 2.15 percent lower on the day at R800.44.

Bats is offering cash and Bats stock worth $56.50 a share for the rest of the company. This represents a roughly 20 percent premium to Reynolds’s closing share price on Friday. Bats already owns 42.2 percent of Reynolds.

Nicandro Durante, the chief executive of Bats, said: “Today we announced an offer for the 57.8 percent of Reynolds not already owned by the group. This offer values Reynolds at $56.50 per share, a 20 percent premium to the closing share price on October, 20 2016.

“Settlement is proposed to be by a mix of both $24.13 in cash and 0.5502 shares of Bats for each Reynolds share.”

Industry analysts believe this deal will cement Bats as the

This offer values Reynolds at $56.50 per share, a 20% premium on (Thursday’s close)

market leader globally.

Ron Klipin, a portfolio manager at Cratos Wealth, said the deal was about Bats consolidating itself as the leader in the industry.

“At the same time the company is facing tightening measures with regulators making it difficult for it to operate in some of the countries.

Some governments are trying to curb smoking.

“Despite these challenges, the company is able to hold on to its market share because it has good brands, so the demand is not going to diminish. It is gaining in emerging markets like Africa, Latin America and the Middle East, although it is facing tight regulations from environmental authorities and the governments,” Klipin said.

The proposal will bring together Bats brands, such as Dunhill, Kent and Lucky Strike cigarettes, with Reynolds American’s Camel and Newport.

Tobacco companies are facing scrutiny because cigarettes provide a health hazard to smokers. A study by the World Health Organisation revealed that about 6 million lives are lost annually, mostly in low-income countries.

Dirk Steyn, a portfolio manager at Mergence Investment Managers, said Bats offered a 20 percent premium of the 57.8 percent of Reynolds American that they did not already own.

“This deal was not unexpected by the market. The deal will be paid for with a combination of $26.8bn Bats shares and $19.9bn of cash and it will make Bats the largest listed tobacco company by revenue and increase the Bats shares in issue by 24.4 percent,” Steyn said.

Bats also released a trading update on Friday where it showed revenue growth for the nine months to end September.

It said its group revenue for the nine months at constant rates of exchange, increased 8.1 percent, or 6.2 percent on an organic basis.

A price-mix of more than 5 percent reflected the continued strong pricing dynamics, including in high inflation markets, despite the growth in the low price segment in some key markets, it said.

“Revenue increased 10.2 percent, further enhanced by the relative weakness in the pound against the group’s key trading currencies,” the group said.

On the results, Steyn added: “I believe these are strong results for the cigarette maker, especially the acceleration in price-mix to 5.3 percent for the nine months from 3.9 percent for the half year. This resulted in organic revenue growth of 6.2 percent that exceeded most analysts’ forecasts.

“These results show again that Bats strategy of focusing on its five global drive brands: Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans, is working and resulted in a gain of 0.4 percent market shares gain and volumes rising by 9.8 percent for these brands.”