British American Tobacco (BAT) has offered to buy out its US partner, Reynolds American, in a $47bn deal that would create the world’s largest tobacco company by sales. The merger would bring together several of the industry’s best-selling brands, including Camel, Lucky Stripe, Newport and Pall Mall.
The British tobacco giant, which already controls a 42 percent stake in Reynolds, is planning to acquire the remaining 58 percent in a cash-and-stock proposal that values the company’s shares at $56.50. BAT is offering a breakdown of $24.13 in cash and $32.37 in shares, representing a premium of 20 percent over the closing price of Reynolds’ stock on 20 October.
Sales of electronic cigarettes hit $6bn in 2015, and the market is expected to grow exponentially over the
next decade
“We have been a shareholder in Reynolds since its creation in 2004 and have benefitted from its growth in the US market”, BAT’s Chief Executive, Nicandro Durante, said in a statement.
“The proposed merger of our two great companies is the logistical progression of our relationship and offers all shareholders a stake in a stronger, truly global tobacco and next generation products company.”
The proposal, which awaits approval from Reynolds’ board of directors, is expected to generate cost savings of $400m a year and will allow both companies to diversify their sources of profit growth. BAT is also looking to ramp up its manufacturing potential through the included acquisition of Reynolds’ two million sq ft production facility in Tobaccoville, North Carolina.
As smoking rates continue to fall in the developed world, BAT hopes that merging with Reynolds will bolster its presence in the lucrative emerging markets of Africa, South America, Asia and the Middle East, where cigarette sales are rising steadily. If approved, the deal will also further extend BAT’s footprint in the US market, where a wave of mergers and acquisitions has significantly consolidated competition in recent years. In the third quarter of this year, Reynolds held a 34.6 percent of the market share, making it the second-largest US tobacco company behind rival Altria.
The proposed acquisition is the latest in a flurry of consolidation activity in the tobacco industry, as companies attempt to combat declining sales in existing markets by cutting costs though strategic mergers. However, as BAT and Reynolds look to a future in the US tobacco market, product innovation may prove to be the new key to success. Sales of electronic cigarettes hit $6bn in 2015, and the market is expected to grow exponentially over the next decade, reaching a value of over $50bn by 2025.
