BAT’s £38bn bid for US partner
British giant defies weak sterling as it attempts to create the world’s largest cigarette company by buying all of Reynolds American
THE British tobacco giant behind Lucky Strike, Pall Mall and Rothmans cigarettes has flipped the trend for foreign takeovers with a $47bn (£38bn) bid to buy up its US partner.
British American Tobacco (BAT) has approached Reynolds American with one of the largest bids for a foreign company made by a British firm in recent years, in a move that would create the world’s largest cigarette company.
BAT, currently the world’s secondlargest tobacco group behind Malboro maker Altria, said it will pay Reynolds’s investors $56.50 per share in a cash and shares deal, a 20pc premium on the Lucky Strike and Camel cigarette maker’s closing share price from October 20. The British group already has a 42.2pc stake in Reynolds, the US’s second-largest cigarette maker, which last year snapped up US peer Lorillard.
Nicandro Durante, BAT’s chief executive, said yesterday: “The proposed merger of our two great companies is the logical progression in our relationship. It offers all shareholders a stake in a stronger, truly global tobacco and next-generation products company.”
Reynolds said it would review the offer and respond in due course.
BAT shares fell 2.8pc to £46.66 in London yesterday while Reynolds’ stock was up 14pc in late trade on Wall Street.
News that the FTSE 100 group was mulling a full takeover of Reynolds was first reported in The Sunday Telegraph in the spring, but yesterday’s move took many in the City by surprise since the expectation of foreign deals by British companies has since cooled given the sharp retreat of sterling against the dollar this summer.
Earlier this year Mr Durante also said that the business would rather attempt smaller “bolt-on acquisitions than big consolidation” after a steady series of deals in 2015.
Guy Ellison, Investec’s head of equities, said although the deal makes “perfect sense” the timing is a surprise after the company ran up its debt on smaller scale acquisitions in recent years. Last year, BAT spent £1.7bn taking full con- trol of its Brazilian subsidiary, Souza Cruz. It also struck a €550m (£425m) deal to buy Croatian cigarette manufacturer TDR, expanding its presence across the Balkans.
“BAT were very busy with M&A last year, maintaining its stake in the enlarged stake in Reynolds-Lorillard group and buying out some minority shareholders, which saw balance-sheet debt step up,” Mr Ellison said. “Now the company is buying dollar-denominated assets in a much devalued sterling.”
Mr Ellison added that the market had been expecting more deals similar to Softbank’s takeover of ARM as companies hunt out sterling assets to swoop on, taking advantage of a stronger euro, dollar or yen.
But a source close to BAT said that conversely that sterling’s fall has helped boost BAT shares to all-time highs while Reynolds’s value has drifted in recent months, making the long-expected deal more likely.
In addition the US litigation environment has showed signs of less punitive damages in recent years, softening the regulatory risk faced by Reynolds. BAT, which faces the threat of a declining appetite for smoking and tighter regulations on home soil, said the merger would boost its presence in the US, the world’s most profitable tobacco market, as well as in emerging territories such as South America, the Middle East and Africa.
The merger would save $400m, BAT added. Under the offer, Reynolds’s shareholders would receive $24.13 in cash and the remainder would be in BAT shares.