Camel cigarette maker sold for $50B
British firm buys Reynolds as part of consolidation trend
British American Tobacco Plc reached an agreement to buy full control of Reynolds American Inc. with a sweetened $49.4-billion (U.S.) offer, bringing a successful end to almost three months of bartering with the maker of Camel cigarettes.
BAT increased the cash element of a cash-and-share bid for the 58 per cent of Reynolds that it doesn’t already own. The new offer values each Reynolds share at $59.64, the London-based maker of Dunhill and Lucky Strike said Tuesday, about 5.6 per cent more than the $56.50 it proposed on Oct. 21.
Hammering out the terms of an improved deal has been a slow process for the cigarette makers, complicated by uncertainty created by Donald Trump’s election.
With agreement in place, the companies can move forward with a combination that marks the latest stage in a wave of consolidation for the industry, which is struggling with shrinking demand for traditional cigarettes and an uncertain pathway to new, potentially less harmful technologies. “The market will be relieved that they have got the deal over the line,” said Richard Marwood, a fund manager at Royal London Asset Management, whose assets include BAT shares. “People were starting to worry that the negotiations might break down.”
The U.K. company said it’s offering $29.44 in cash and 0.526 of a BAT share for each Reynolds share, pushing the cash element up from $24.13. That values Reynolds at 16.9 times earnings before interest, tax, depreciation and amortization, BAT said, a higher multiple than for comparable industry deals, reflecting BAT’s desire to boost its standing in the race to replace traditional cigarettes with products such as Reynolds’s Vuse brand.
Analysts have said a possible corporate tax cut by President-elect Trump would also justify an increase in the bid, although BAT denied that played any role.
“BAT shareholders will be the happier of the two groups because they will be getting the potential benefits from a lower corporate tax rate,” said James Bushnell, an analyst at Exane BNP Paribas.
Uncertainty over the tax rate is reflected in a breakup fee of $1 billion should either side pull out of the deal, Bushnell said. The transaction requires the approval of at least 50 per cent of Reynolds shareholders in a vote that will exclude BAT.
BAT forecast a minimum of $400 million of annual cost synergies within three years. The U.K. company has gained confidence in the target and is studying ways to exceed it, chief financial officer Ben Stevens said on a conference call. Combined, the two companies would overtake Philip Morris International Inc., the maker of Marlboro, as the world’s largest publicly traded tobacco company by revenue. It would give the U.K. company an initial foothold in the U.S., which will account for about 35 per cent of the combined group’s revenue, according to Bloomberg data.
The combination could herald more tobacco-industry deals. Japan Tobacco Inc. buying Britain’s Imperial Brands Plc, and Philip Morris International Inc. remerging with Altria Group Inc. eight years after splitting are the most plausible scenarios, experts say.
BAT has held a stake in Reynolds since the U.S. company was created in 2004, and the two tobacco giants are close partners on vapour technology innovation.