British American Tobacco (BAT) has offered the equivalent of $47bn to buy the outstanding 57.8% of Reynolds Tobacco which it is does not already own to create the world’s biggest tobacco company – both in annual revenues and anticipated profitability terms.

 

Any successful takeover or ‘merger’ could potentially bring several well-known brands under one umbrella, including Camel, Dunhill, Rothmans and several others, although the proposal has only just landed on the Reynolds’ boardroom table.

 

FOLLOWING US SECURITIES LAW PROCEDURE

This is due to the requirement by US securities law obliging BAT (or any company) to announce any takeover proposal promptly after making it and prior to any talks or negotiations with any third party that might be the subject of attention.

 

 

 

 

 

The BAT proposal currently values the Winston-Salem-based Reynolds at $56.50 per share, of which $24.13 is being offered in cash and $32.37 in BAT shares.

 

The offer is also said to represent a premium of 20% over the closing price of Reynolds common stock as of 20 October 2016 and an Enterprise Value of $93bn which, based on reported LTM EBITDA to 30 September 2016 represents a multiple of 16.3x.

 

 

 

 

A ‘NEW GENERATION PRODUCTS’ COMPANY

The proposer claims this offer will create a stronger, truly global tobacco and ‘Next Generation Products’ company with significant advantages, which it lists as follows:

 

1. A leading position in the US tobacco market, the largest global profit pool (ex-China) with strong growth dynamics;

 

2. A significant presence in high growth emerging markets across South America, Africa, the Middle East and Asia, together with the most attractive developed markets;

 

3. A unique portfolio of strong brands, bringing together ownership of Newport, Kent and Pall Mall;

 

4. Combined Next Generation Products and R&D capabilities to deliver a world-class pipeline of vapour and tobacco heating products across all the fastest growing NGP markets globally;

 

5. Creating the world’s largest listed tobacco company by net turnover and operating profit.

 

6. There is a strong financial rationale for the transaction that supports long-term delivery for all stakeholders:

 

 

 

 

BAT SAYS PROPOSAL IS GOOD FOR SHAREHOLDERS

In a supporting statement for its proposal, BAT which has been a shareholder in Reynolds for 12 years commented: “This is a premium offer, supported by modest cost synergies, with a significant share consideration enabling participation in the long-term benefits. It is earnings accretive in the first full year. It is expected to be accretive to dividends per share.

 

“The transaction would create a broader, larger business, delivering more diversified sources of profit growth. The combined company would maintain a strong financial profile, with a target of maintaining a solid investment grade credit rating and enhanced cash generation.”

 

Nicandro Durante, CEO at BAT commented: “We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the US market. The acquisition of Lorillard in 2015 has further strengthened Reynolds’s business.

 

“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 tobacco and Next Generation Products company. BAT is proud of its track record of consistent delivery for shareholders and this transaction would further strengthen that delivery in the future.”