LONDON (Reuters) - British American Tobacco (BATS.L) has offered to buy out U.S. cigarette maker Reynolds American Inc RAI.N in a $47 billion takeover that would create the world’s biggest listed tobacco company with brands including Newport, Lucky Strike and Pall Mall.

The cash-and-stock deal would mark the return of BAT to the lucrative and highly regulated U.S. market after a 12-year absence, making it the only tobacco giant with a leading presence in American and international markets.

It would also give the British company - which has been bolstered by a strong share price since the country voted to leave the European Union - more premium brands such as Camel which it can sell in countries like Russia and Turkey where demand for Western cigarettes is still growing.

The marriage would also unite each company’s efforts in the fast-developing world of e-cigarettes, which the companies say are less dangerous than smoking - a habit that kills about six million people worldwide each year.

BAT shares closed down almost 2.9 percent, while Reynolds was up almost 7 percent in afternoon trading in New York.

Morningstar analyst Adam Fleck said the BAT decline could be because “the price looks rich to us.”

“Our take is that it is a little bit over valued,” he said.

Moody’s also said Friday it is reviewing BAT’s A3 ratings for a possible downgrade.

“Our decision to place BAT’s ratings on review for downgrade recognizes that, while the acquisition will enhance BAT’s business profile, it could lead to a significant deterioration in BAT’s credit metrics,” says Ernesto Bisagno a Moody’s Vice President and lead analyst for BAT.

A Reynolds takeover by BAT, which already owns 42 percent of the U.S. group, has long been seen as part of an inevitable wave of global consolidation in a mature industry. Yet the timing, less than three weeks before a U.S. presidential election, was unexpected.

“This proposed deal manages to be both entirely expected and a surprise,” Euromonitor analyst Shane MacGuill said.

The completion of last year’s purchase by Reynolds of Lorillard, which gave it the popular Newport brand, and the current relative valuations of the two companies’ shares were the main reasons the deal was resurrected in recent weeks, said three sources close to the situation.

“It moved very quickly on the back of the falling pound,” said one of the sources, who all declined to be named in discussing private matters. A final decision was made this week, they said.

A 12 percent rise in BAT’s shares since Britons opted for Brexit in June, and a 7 percent fall for Reynolds, brought the companies’ trading multiples closer together, making a deal more affordable, the sources said.

The move increased the value of the share element of the offer for the U.S. shareholders of Reynolds, even as it made the cash portion more costly for the UK company.

But one source likened the deal to simplifying Reynolds’s structure by removing the stake it does not own. “It’s always been on the cards,” he said.

After the Brexit vote, shares in BAT soared to all-time highs as investors bet the falling pound would lift the value of overseas revenue. BAT, whose share appreciation is less pronounced in dollar terms, does the vast majority of its business outside the country. It has over 200 brands in over 200 markets.

The pound has lost about a fifth of its value against the dollar since the EU referendum on June 23.

With little geographic overlap and therefore limited antitrust issues, this deal is also a lot simpler than another oft-speculated deal - that BAT would take over British rival Imperial Brands (IMB.L), the source added.

People walk past the British American Tobacco offices in London, Britain October 21, 2016. REUTERS/Stefan Wermuth

Imperial shares were up 2 percent on Friday, with one analyst saying a general reignition of consolidation in the industry may be outweighing the fact that BAT is now unlikely to bid for its rival in the near term.

Altria Group (MO.N) shares were up 4 percent in New York, boosted by hopes that an enlarged BAT would push Swiss-based market leader Philip Morris International (PM.N) to reunite with the U.S. company. The Marlboro maker split into two in 2008, when the risk of litigation in the United States was seen as a deterrent to foreign companies.

CASH AND STOCK

Reynolds, based in Winston-Salem, North Carolina, acknowledged receipt of the unsolicited offer. This was made public immediately after BAT’s approach to the Reynolds board, as required by U.S. securities regulators in cases where the buyer is a big shareholder.

Reynolds said it would review the offer and respond in due course.

The British group said its offer valued Reynolds’s shares at $56.50, of which $24.13 would be in cash and $32.37 would be in BAT shares, representing a premium of 20 percent over the closing price of Reynolds stock on Thursday. On Friday afternoon Reynolds shares, at $53.73, were below the offer price.

Wells Fargo analyst Bonnie Herzog said she expected Reynolds to push for a higher price than the $47 billion BAT is offering for the remaining 57.8 percent of the company. Under the offer, $20 billion would be in cash and $27 billion in BAT shares.

One source estimated that BAT valued Reynolds’s shares at 16.3 times earnings before interest, tax, depreciation and amortization (EBITDA), higher than what Reynolds paid for Lorillard.

BAT Chief Executive Nicandro Durante, a long-distance runner who hails from Sao Paolo, Brazil, said the deal would create a U.S. market leader and the world’s largest listed tobacco company by net turnover and operating profit.

“The strategic rationale makes perfect sense,” Guy Ellison, an analyst at Investec Wealth & Investment, said. He cited a BAT pivot toward the large U.S. market - whose profit pool is protected by high barriers to entry - and improved scale in vapor products like e-cigarettes, which all big tobacco companies are investing in to offset declines in smoking.

BAT said the deal would add to earnings in the first year after closure and estimated cost savings of about $400 million. It is contingent on approval from independent members of the Reynolds board who were not nominated by BAT.

COMING TO AMERICA

The recent strength of BAT’s share price is also due to geopolitical uncertainty leading investors to seek out stable, dividend-yielding stocks like tobacco and other consumer staples.

Shares in Reynolds fell to a 12-month low on Wednesday of $43.38 after its third quarter earnings were 6 percent short of market forecasts, Jefferies analysts said, on the back of a 1.5 percent fall in domestic cigarette volumes.

If successful, the takeover would be one of the biggest this year globally. Including debt, this would be the largest UK outbound M&A; deal this year and the fourth largest of all-time, according to Reuters data.

BAT stopped operating in the United States in 2004, when it merged its U.S. subsidiary Brown & Williamson with R.J. Reynolds to form Reynolds American.

Due to a series of high-profile U.S. lawsuits against tobacco firms, the big four have all limited their exposure to the market. Yet several cases have now been settled, which has led analysts to speculate that international players could return.

Imperial Brands waded into the U.S. market last year with its $7 billion purchase of certain brands from Reynolds to ease the $25 billion purchase of Lorillard.

Smoking rates in the United States and other western markets are declining due to increasing health consciousness, and greater regulation and taxes. Yet their addictive nature and high profit margins make them a profitable business.

Slideshow (7 Images)

BAT is being advised by Centerview, Deutsche Bank and UBS.

BAT also said on Friday it had performed well in the first nine months of the year, raising both revenue at constant rates of exchange and cigarette volumes.

Year-to-date revenue grew 8.1 percent at constant rates of exchange, it said, as its biggest brands sold 9.8 percent more cigarettes.</s>British American Tobacco has offered to pay $47bn (£38bn) to take full control of Reynolds American in a deal that would create the world’s biggest tobacco company by revenue and profit.

BAT already owns 42.2% of Reynolds and is offering to buy the remaining shares in the company, which traces its roots back to before the American war of independence.

The UK company has offered to pay $56.50 a share, comprising $24.13 in cash and $32.37 in BAT shares, for the Reynolds shares it does not already own. BAT, which does not have its own US business, has owned a stake in Reynolds for 12 years.

The offer, structured as a merger, is worth 20% more than Reynolds’ closing price on 20 October and values the US company at £66bn. The combined company would be valued at about £157bn.

BAT shares, up 30% this year, rose 2.3% to £49.13 and were the biggest gainers in the FTSE 100 index. Imperial Brands, its UK rival, rose 1.6%. Speculation has been rife for months that BAT might decide to buy out Reynolds as tobacco companies jockey for position.

BAT said buying Reynolds, the number two US tobacco company after Philip Morris, would give it a leading position in the American market, the world’s second-biggest after China. Reynolds owns Pall Mall, the biggest US low-cost brand, Newport, the top-selling menthol cigarette, and Camel, a mid-market name that is the third-biggest seller in the US.

Nicandro Durante, BAT’s chief executive, 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.”



Under US law, as a part-owner of Reynolds, BAT was required to announce its offer immediately and before the Reynolds board had responded. BAT said Reynolds shareholders would gain from the deal by holding shares in a bigger company with the clout to sell Reynolds’s brands round the world.

Guy Ellison, head of UK equities at Investec Wealth & Investment, said that while the timing of the move was a surprise, the strategic rationale made “perfect sense, pivoting BAT further towards the high value US market, consolidating some strong brands and Reynold’s position in next generation tobacco.”</s>LONDON — British American Tobacco has offered to buy out Reynolds American Inc. for $47 billion in an attempt to gain a strong presence in the U.S., a lucrative market where sales of electronic cigarettes are booming as traditional smoking fades.

The takeover would create the world’s largest publicly traded tobacco company and combine BAT’s presence in developing countries, where anti-smoking campaigns are not as strong as in the U.S. and Europe, with Reynolds’ almost exclusive focus on the U.S.

BAT already owns 42 percent of Reynolds and sells Dunhill, Rothmans and Lucky Strike cigarettes. Reynolds controls about a third of the U.S. market with brands like Newport, Camel and Pall Mall.

Though smoking in the U.S. is declining, it remains “the largest global profit pool” outside of China, BAT said in a statement Friday. The U.S. is one of the biggest markets for e-cigarettes.

“BAT and Reynolds American have a strong existing relationship, and while cost savings will be relatively modest, the full access this acquisition would give BAT to the U.S. — a lucrative, consolidated market with high barriers to entry — means it makes eminent sense,” Shane MacGuill, head of tobacco at Euromonitor International, said by e-mail.

The British company offered Friday to buy the Reynolds shares it doesn’t already own for the equivalent of $56.50 each, 20 percent more than Thursday’s closing price. Investors would receive $24.13 in cash and 0.5502 of a BAT share for each Reynolds share they own. That values Reynolds, based in Winston Salem, North Carolina, at $93 billion.

Reynolds shares jumped 13.5 percent to $53.50 in in New York, while BAT edged down 0.3 percent to 47.88 pounds in London.

The deal is the latest attempted merger in the industry as tobacco companies face weakening demand in developed markets. Only last year, Reynolds American acquired Lorillard, the maker of Newport, the U.S.’s best-selling menthol cigarette brand.

Reynolds traces its roots to 1875, when Richard Joshua Reynolds started a chewing tobacco company in what was then Winston, North Carolina. The company’s links with British American Tobacco date to 2004, when R.J. Reynolds Tobacco Co. merged with BAT’s Brown & Williamson unit, creating Reynolds American. BAT was left with a 42 percent stake in the new company.

The two companies already have a technology-sharing agreement in the development of electronic cigarettes.

The merger “is the logical progression in our relationship and offers all shareholders a stake in a stronger, truly global tobacco and next generation products company,” Chief Executive Nicandro Durante said in a statement.

Reynolds said in a statement that it will evaluate the offer.

Tobacco companies are particularly keen to expand in developing countries to make up for weaker sales in Europe and the U.S. The industry has been grappling with widespread anti-smoking campaigns that have forced companies like BAT and Reynolds to diversify into nicotine replacements and e-cigarettes to meet consumer health concerns.

It also comes only months after Britain instituted plain packaging rules for cigarettes. The idea is to dampen the allure of cigarettes created by advertising and prevent a new generation from taking up the habit.

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.”

“The markets in which these firms are the dominant players are declining, and they face ever increasing competition from Asia in seeking to develop new markets,” said Nigel Driffield, professor of international business at Warwick Business School in England.

Asian tobacco companies face less public pressure over increasing sales in developing markets, where public health regulation may not be as strict, he said.

But the U.S. remains an important market. Owen Bennett, an equity analyst at Jefferies International, underscored that the United States currently accounts for 45 percent of global sales of e-cigarettes, also known as vapor cigarettes.

“If vapor accelerates as we expect, then the U.S. is the place to be,” he said. “The deal would also give BAT the best exposure to global e-vapor development.”

BAT employs more than 50,000 people globally while Reynolds employs 5,700, mostly in the U.S.

The planned merger would create a company likely to overtake Philip Morris International Inc. as the world’s biggest publicly traded tobacco company. But China’s National Tobacco Corp. is bigger than BAT and Reynolds both combined, Euromonitor International data showed.

BAT, founded in 1902, sold 663 billion cigarettes in more than 200 countries last year and generated revenue of 13.1 billion pounds ($16 billion). Reynolds shipped 76 billion cigarettes last year and reported sales of $10.7 billion.</s>British American Tobacco has offered to buy U.S. tobacco company Reynolds American Inc in a $47-billion deal that would bring together Newport, Kent and Pall Mall cigarettes in the world’s biggest listed tobacco company.

The British group, which has a 42-per-cent stake in Reynolds, said its offer valued the company’s shares at $56.50, of which $24.13 would be in cash and $32.37 would be in BAT shares, representing a premium of 20 per cent over the closing price of Reynolds stock on Thursday.

The total price for the remaining 57.8 per cent of Reynolds would be $47-billion, of which approximately $20-billion would be in cash and $27-billion in BAT shares.

BAT Chief Executive Nicandro Durante said the deal would create the U.S. market leader and the world’s largest listed tobacco company by net turnover and operating profit.

A spokesman for Reynolds was not immediately available outside U.S. business hours.

Shares in BAT have traded at all-time highs since Britain voted to leave the EU in June, a shock decision that sent the pound tumbling and boosted the stock prices of companies that make most of their revenue outside the United Kingdom.

BAT shares, which reached a high of 5,135 pence in July, were trading up 2.3 per cent at 4,913 pence at 0722 GMT. If successful, the takeover would be one the biggest this year by a British company.

The tie-up is also one of the only mega deals left in a global tobacco industry which is already dominated by six companies, and it would create the only player with a major presence in both U.S. and international markets.

Reynolds, which bought Newport-maker Lorillard in 2014, and Altria Group dominate the U.S. market. It has so far not responded to the offer.

Smoking rates in the United States and other western markets are declining, due to increasing health consciousness and greater regulation and taxes. All big tobacco firms are investing in e-cigarettes and other vapor-based products, to diversify.

BAT has in recent years focused on international markets such as Ukraine, Bangladesh, Russia, Vietnam and Turkey where smokers are increasingly choosing premium cigarettes like its Dunhill, Lucky Strike, Pall Mall and Rothmans brands.

Its brands are sold in more than 200 markets, with market-leading positions in at least 55.

Reynolds’ stock fell to a 12-month low on Wednesday after its third-quarter earnings came in 6 per cent short of market forecast, Jefferies analysts said, on the back of a disappointing 1.5 per cent fall in domestic cigarette volumes.

BAT also said on Friday it had performed well in the first nine months of the year, growing both revenue at constant rates of exchange and cigarette volumes, driven by its focus Year-to-date revenue grew 8.1 per cent at constant rates of exchange, it said, as its biggest brands sold 9.8 per cent more cigarettes.

BAT was advised by Centerview, Deutsche Bank and UBS on the deal.</s>LONDON | British American Tobacco is offering to buy Reynolds American Inc. in a $47 billion deal that would create the world’s largest publicly traded tobacco company and attempt to make up for a decline in smoking in the U.S. and Europe.

With tobacco firms under pressure from health groups in developed economies and increasingly popular electronic cigarettes, a merger of this size would help them consolidate costs and resist competition from Asia, analysts say.

BAT, which is based in London and owns brands like Dunhill, Rothmans and Lucky Strike, has a greater presence in faster-growing regions like Latin America, Africa, the Middle East and Asia.

It is much larger as a company than Reynolds, which is predominantly focused on the U.S., where its Newport, Camel and Pall Mall brands are among the top four in the country.

London-based BAT offered Friday to buy the 57.8 percent of Reynolds it doesn’t already own for the equivalent of $56.50 per share, 20 percent more than Thursday’s closing price. Investors would receive $24.13 in cash and 0.5502 of a BAT share for each Reynolds share they own.

The deal values Reynolds, based in Winston Salem, North Carolina, at $93 billion.

Shares in Reynolds jumped about 20 percent to $56.50 in premarket trading in New York, while BAT was up 4.1 percent to 50 pounds in London.

The merger “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 Chief Executive Nicandro Durante said, referring to the firms’ expansion into electronic cigarettes.

Reynolds said in a statement that it will evaluate the offer.

Tobacco companies are particularly keen to expand in developing countries to make up for weaker sales in Europe and the U.S., where public awareness about the health hazards of smoking has grown.

“The markets in which these firms are the dominant players are declining, and they face ever increasing competition from Asia in seeking to develop new markets,” said Nigel Driffield, professor of international business at Warwick Business School in England.

Asian tobacco companies, he said, face less public pressure to not ramp up sales in developing markets, where public health regulation may not be as strict.

BAT said it had announced the offer before conducting any negotiations with Reynolds to comply with U.S. law. The deal would have to be approved by the independent directors of Reynolds and shareholders of both companies.

BAT employs more than 50,000 people globally and has 200 brands in 200 markets. Reynolds employs 5,700, mostly in the U.S.</s>LONDON—British American Tobacco (BAT) is offering to buy Reynolds American Inc in a US$47 billion deal that would create the world’s largest publicly-traded tobacco company and attempt to make up for a decline in smoking in the US and Europe.

Local manufacturer West Indian Tobacco Company Limited (WITCO) is a member of the British American Tobacco Group.

With tobacco firms under pressure from health groups in developed economies and increasingly popular electronic cigarettes, a merger of this size would help them consolidate costs and resist competition from Asia, analysts say.

BAT, which is based in London and owns brands like Dunhill, Rothmans and Lucky Strike, has a greater presence in faster-growing regions like Latin America, Africa, the Middle East and Asia.

It is much larger as a company than Reynolds, which is predominantly focused on the US, where its Newport, Camel and Pall Mall brands are among the top four in the country.

London-based BAT offered Friday to buy the 57.8 per cent of Reynolds it doesn’t already own for the equivalent of US$56.50 per share, 20 per cent more than Thursday’s closing price. Investors would receive US$24.13 in cash and 0.5502 of a BAT share for each Reynolds share they own. The deal values Reynolds, based in Winston Salem, North Carolina, at US$93 billion.

Shares in Reynolds jumped about 20 per cent to US$56.50 in premarket trading in New York, while BAT was up 4.1 per cent to £50 in London.

The merger “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 Chief Executive Nicandro Durante said, referring to the firms’ expansion into electronic cigarettes.

Reynolds said in a statement that it will evaluate the offer.

Tobacco companies are particularly keen to expand in developing countries to make up for weaker sales in Europe and the US, where public awareness about the health hazards of smoking has grown.

BAT said it had announced the offer before conducting any negotiations with Reynolds to comply with US law.

The deal would have to be approved by the independent directors of Reynolds and shareholders of both companies.

BAT employs more than 50,000 people globally and has 200 brands in 200 markets.

Reynolds employs 5,700, mostly in the US. (AP)</s>Oct 21 British American Tobacco has offered to buy U.S. tobacco company Reynolds American Inc in a $47 billion deal bringing together Newport, Kent and Pall Mall cigarettes to create the U.S. market leader.

The British group, which has a 42 percent stake in Reynolds, said its offer valued the company's shares at $56.50, of which $24.13 would be in cash and $32.37 would be in BAT shares, representing a premium of 20 percent over the closing price of Reynolds common stock on Oct. 20.

The total consideration for the remaining 57.8 percent of Reynolds would be $47 billion, of which approximately $20 billion would be in cash and $27 billion in BAT shares, it said on Friday. (Reporting by Paul Sandle; editing by Susan Thomas)</s>British American Tobacco (BAT) has proposed a $47 billion (£38bn) merger with US tobacco firm Reynolds, the maker of Camel and Pall Mall.

If it goes ahead, the deal would create the world’s largest listed tobacco company.

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

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.”

READ MORE: Plain cigarette packaging to hit shelves after court battle win

The offer would value the 57.8 per cent stake at $56.50 dollars a share, representing a 20 per cent premium against yesterday’s closing price of Reynolds shares.

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 Reynolds acquisition would add to BAT’s portfolio of 200 tobacco brands. The company currently employs more than 50,000 people globally and sells its products across 200 markets.

BAT, which reported £5bn in adjusted operating profit in 2015, said the deal with Reynolds would create a tobacco company with the largest global profit pool, excluding China.

The firm would also have a leading position in the US, and a significant presence in high-growth markets including South America, the Middle East and Africa.

Click here to ‘Like’ The Scotsman Business on Facebook</s>BAT offers to buy Reynolds American in a $47-billion deal that could create the world's biggest listed tobacco company in a sector battling with a decline in traditional smoking. Ivor Bennett reports.</s>The owner of Lucky Strike wants to add Camel and Newport to its pack.

British American Tobacco (BAT) on Friday announced a $47 billion bid to take control of fellow cigarette giant Reynolds (RAI).

The two companies hold some of the biggest selling tobacco brands in the world.

BAT already owns about 42% of Reynolds. But it says its willing to shell out $47 billion to buy the remaining 58%.
British American Tobacco offers to buy out U.S. cigarette maker Reynolds American Inc in a $47 billion takeover that would create the world's biggest listed tobacco company.