After taking over US rival Lorillard last year, cigarettes group Reynolds American Inc (NYSE:RAI) looks set to fall into the clutches of a British rival.
London-listed British American Tobacco PLC (LON:BAT) – popularly known as BATS – has used its 42.2% stake in Reynolds as a launch-pad for a cash-plus-shares bid worth US$56.50 per Reynolds share, based on last night’s closing prices.
Shares in Reynolds rose to US$57, up 21%, in pre-market trading.
BATS, which has partnership deals in place with Reynolds, has not had time to secure agreement from the independent directors of Reynolds yet, but it hopes to do so. It will also need to secure the support of holders of the 57.8% of the US company it does not already own.
The US company’s shareholders are being offered US$24.13 in cash and 0.5502 BATS shares for each of their shares. The total consideration for the remaining 57.8% of Reynolds would be US$47 billion, BATS said, of which around US$20 billion would be in cash and US$27 billion in BATS shares.
The UK company said the premium it is offering over the current share price of Reynolds is justified by modest cost synergies, and that the acquisition, if it goes through, would enhance earnings in the first full year of ownership.
“The transaction would create a broader, larger business, delivering more diversified sources of profit growth,” BATS claimed.
The merger would put some of the tobacco industry’s best-known brands, including Rothman’s, Dunhill, Pall Mall, Winston and Camel cigarettes, under the same roof.
BATS has held a large chunk of Reynolds for 12 years after it merger its US operations with RJ Reynolds, the second largest tobacco company in the US after Altria Group Inc (NYSE:MO), which owns Philip Morris USA Inc.
If it pulls off this deal, which looks likely given its substantial shareholding, then it would definitely put the American to the fore in the UK company’s name.
The shares element of the offer will leave Reynolds shareholders with a stake in one of the global giants of the tobacco industry, and will also save the British company a few quid (pounds), which is important given the collapse in the British currency in the second half of the year.
Reynolds has acknowledged receipt of the proposal and is considering its options.
“The timing is a surprise, but the strategic rationale makes perfect sense, pivoting BAT further towards the high value US market, consolidating some strong brands and Reynolds’s position in next generation tobacco,” said Guy Ellison, head of UK equities at Investec Wealth & Investment.
“Despite relatively modest synergies, the deal is still seen adding value for shareholders in the first full-year after completion. The ball is now in the court of Reynolds’s board and shareholders to consider the offer,” Ellison added.
Story by ProactiveInvestors