BAT megamerger is a fi­nal con­sol­i­da­tion act

The Star Early Edition - - COMPANIES - Ka­belo Khu­malo

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.

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