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BAT shares soar over £38bn Reynolds mega-merger move

Published 21/10/2016

A deal between BAT and Reynolds would create the world's largest listed tobacco company
A deal between BAT and Reynolds would create the world's largest listed tobacco company

British American Tobacco (BAT) has proposed a 47 billion US dollars (£38.3 billion) merger with US tobacco firm Reynolds, the maker of Camel and Pall Mall.

The deal would create the world's largest listed tobacco company.

BAT currently owns 42.2% of Reynolds and the proposal involves the acquisition of the remaining 57.8% of the company.

If approved, the deal would bring a raft of global brands under one roof, including BAT products like Dunhill, Lucky Strike, Rothmans, Kool, and Kent, and Reynolds brands like Newport, Camel, Pall Mall, Doral, Misty, and Capri slims.

The news sent BAT shares soaring by more than 3.2%, making it one of the best performing stocks in the FTSE 100.

BAT chief executive Nicandro Durante said: "We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the US market.

"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."

BAT's 47 billion US dollar (£38.3 billion) offer will be made through 27 billion US dollars (£22 billion) worth of BAT shares and 20 billion (£16.3 billion) US dollars in cash.

It values the 57.8% stake at 56.50 US dollars (£46) per share, representing a 20% premium against the closing price of Reynolds shares on October 20.

The merger has yet to be approved by Reynolds' board of directors. If given the green light, the deal would also be put forward to both BAT and Reynolds shareholders.

The companies' combined earnings stand to be significant. BAT last year reported £5 billion in operating profit, while Reynolds reported net income of 3.3 billion US dollars (£2.7 billion).

BAT first invested in Reynolds through a deal which saw BAT's US subsidiary Brown & Williamson merge with RJ Reynolds in 2004, giving BAT its original 42% stake in the US firm.

In 2014, BAT pumped 4.7 billion US dollars (£3.8 billion) into Reynolds in order to maintain its stake in the company following a mega-deal that saw Reynold's acquire sector peer Lorillard for 27.4 billion US dollars (£22.3 billion).

The proposed merger would help BAT gain a further foothold in the US, and give the new company a significant presence in high-growth markets including South America, the Middle East and Africa.

Owen Bennett, an equity analyst at Jefferies International, highlighted that the US is "one of the most attractive profit pools in the world", and currently accounts for 45% of global vapour cigarette sales.

He said: "If vapour accelerates as we expect then the US is the place to be. The deal would also give BAT the best exposure to global e-vapour development.

"We are also of the view that Reynolds heat-not-burn technology is more advanced than BAT's so this will enable them to get a viable competitor to PMI (Philip Morris International) out into the ex-US markets sooner than expected."

The industry has been grappling with widespread anti-smoking campaigns which have forced companies like BAT and Reynolds to diversify into nicotine replacements and e-cigarettes to meet consumer health concerns.

Reynolds warned in a 2016 filing that if its companies "are not able to develop, produce or market new alternative products profitably, the results of operations, cash flows and financial positions ... could be adversely affected."

Press Association

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