Daring £38bn bid to forge a tobacco giant

British owner of Dunhill in shock swoop for US rival

‘Benefited from its growth in the US’

THE £38bn takeover of Reynolds by British American Tobacco would generate a fees bonanza in the City and create a tobacco giant that makes three-quarters of a trillion cigarettes a year.

London-based BAT already owns 42.2pc of its US rival and is now planning to buy the remaining 57.8pc – creating one of the world’s biggest tobacco companies.

Reynolds is understood to have told BAT it is open to a deal but may seek a higher price.

It raises the prospect of BAT being forced to come back with billions of pounds more if it wants to seal a deal that would see its brands including Dunhill, Kent, Lucky Strike and Rothmans come under the same roof as Camel and Newport.

Both companies manufacture Pall Mall cigarettes, with ReyBAT’s nolds selling them in the US and BAT in the rest of the world.

BAT has a 5pc share of the US market but accounts for more than half of all cigarettes sold in Latin America.

Sources said that the takeover would ‘put the American back in British American Tobacco’ and help it challenge Marlboro maker Philip Morris.

BAT sold 663bn cigarettes last year while Reynolds sold 83bn – meaning the combined group would sell 746bn a year or 2bn a day and 23,655 a second.

If a deal is struck it would be the biggest overseas buyout by a British company since Royal Bank of Scotland’s disastrous takeover of ABN Amro and would trigger a windfall in fees, likely to be more than £100m, for advisers including Deutsche Bank and UBS.

It would also be the latest big deal in the ‘sin’ sector following the £79bn merger between brewers SAB Miller and AB InBev and a wave of consolidation in the gambling industry.

BAT shares fell 2.9pc, or 137p, to 4666p in London, while Reynolds shares jumped 15pc in New York. Brazilian chief executive Nicandro Durante said that a tie-up would boost both companies’ presence in the fast-growing vaping market. The industry has been grappling with widespread anti-smoking campaigns, which have forced companies such as BAT and Reynolds to diversify into nicotine replacements and e-cigarettes to meet consumer health concerns.

Durante said: ‘We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the US market. The proposed merger of our two great companies is the logical progression in our relationship and offers all shareholders a stake in a stronger, truly global company.

‘BAT is proud of its track record of consistent delivery for shareholders, and this transaction would further strengthen that delivery in the future.’

BAT’s £38.3bn offer includes £22bn of BAT shares and £16.3bn of cash. The deal has yet to be approved by the Reynolds board. If it gets the green light it will then be put to both BAT and Reynolds shareholders.

The proposed takeover would help BAT gain a further foothold in the US and give the new company a significant presence in high-growth markets including South America, the Middle East and Africa.

Owen Bennett, an equity analyst at Jefferies International, said the US is ‘one of the most attractive profit pools in the world’ and currently accounts for 45pc of global vapour cigarette sales.

‘If vapour accelerates as we expect then the US is the place to be,’ he said, adding that Reynolds ‘is more advanced than BAT’ in developing technology for cigarettes which warms rather than burns tobacco.