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BAT Makes $47B Bid for 100% RAI Ownership

WINSTON-SALEM, N.C. — More changes could be coming to the tobacco landscape now that British American Tobacco plc (BAT) made an offer to acquire Reynolds American Inc. (RAI) for $47 billion.

RAI acknowledged receiving a non-binding proposal from BAT to purchase the approximately 58 percent of RAI common stock that BAT does not currently own. The RAI board of directors, consistent with their fiduciary duties, will evaluate the offer from BAT and respond accordingly.

BAT already owns 42.2 percent of RAI. In accordance with U.S. securities laws, BAT announced its merger proposal promptly after it was made to the RAI's board. As a result, BAT has been unable to have prior negotiations with Reynolds regarding the proposal.

According to BAT, the $47-billion offer values RAI at $56.50 per share, of which $24.13 would be in cash and $32.37 would be in BAT shares. It represents a premium of 20 percent over the closing price of RAI common stock on Oct. 20.

The U.K.-based tobacco company also explained the proposed merger would create "a stronger, truly global tobacco and Next Generation Products (NGP) company" with:

  • A leading position in the U.S. tobacco market, the largest global profit pool (excluding China) with strong growth dynamics.
  • A significant presence in high-growth emerging markets across South America, Africa, the Middle East and Asia, together with the most attractive developed markets.
  • A unique portfolio of strong brands, bringing together ownership of Newport, Kent and Pall Mall.
  • Combined Next Generation Products (NGP) and research and development capabilities to deliver a world class pipeline of vapor and tobacco heating products across all the fastest-growing NGP markets globally.
  • The world's largest listed tobacco company by net turnover and operating profit.

"We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the U.S. market. The acquisition of [Lorillard Inc.] in 2015 has further strengthened Reynolds's business," said BAT's Chief Executive Nicandro Durante.

"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," Durante added.

According to Vivien Azer, director and senior research analyst at Cowen and Co., with the U.S. representing one of the best profit pools in global tobacco, BAT will not only gain access to this attractive market, but also to RAI's pipeline on New Generation tobacco products.

She added Cowen and Co. views the multiple offered for RAI as quite compelling. That said, "RAI CEO Susan Cameron has distinguished herself by creating exceptional shareholder returns via both the acquisition of Lorillard as well as the $5-billion sale of Natural American Spirit's international business to Japan Tobacco Group," Azer explained.

"As such, we would not rule out the possibility of RAI negotiating a modest premium relative to this offer. We would note that we would not expect these negotiations to be protracted, given that this deal could face far less regulatory scrutiny — as unlike the Lorillard deal, we do not see any meaningful antitrust issues," she added.

Winston-Salem-based RAI became the No. 2 tobacco company in the United States less than a year and half ago when it closed on its acquisition of Lorillard, maker of the Newport brand. The three-way deal included Imperial Brands, then known as Imperial Tobacco Group, buying several brands from the two tobacco companies, making Imperial and its ITG Brands LLC the No. 3 player in the U.S. tobacco space.

RAI is the parent company of R.J. Reynolds Tobacco Co., Santa Fe Natural Tobacco Co. Inc., American Snuff Co. LLC, Niconovum USA Inc., Niconovum AB and R.J. Reynolds Vapor Co.

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