By Mack Wilowski, International Business Writer
On Tuesday January 17, British American Tobacco (BAT) announced it would be taking over its largest U.S. rival, Reynolds American, in a deal amounting to $49.3 billion, or £39.9 billion. The merger will cement British American Tobacco as the world’s largest public tobacco company. The current offer has been negotiated with a $2 billion increase from the initial offer set by the two companies. British American, who already owned up to 42 percent of Reynolds’ assets prior to the deal, announced it would repay shareholders of Reynolds up to $29.44 per share. It is a bargain for Reynolds investors, as they will receive a 26 percent premium over Reynolds’ last recorded stock price before the initial agreement was made in October of last year. With a market capitalization of $107 billion, British American will acquire the moderate-sized tobacco firm with a $79 billion market capitalization. Once the deal is completed, British American Tobacco will have made its way back into the highly regulated and risky American tobacco market after an extended 12-year absence.
British American cites investment opportunities as one of the key reasons for going forward with the Reynolds deal. Outside of China, British American views the United States as the most profitable tobacco market taking into account its interests. Affordable prices per pack, a growing market for e-cigarettes, and high disposable income are among the three main reasons for the company’s interests in the U.S. market; and all three present opportunities for growth.
Prior to the agreement, Reynolds American held a 34 percent share of the U.S. cigarette market, trailing behind only Altria Group. In an interview, Reynolds Chief Executive Debra Crew stated that the deal would provide an opportunity for brands of both companies to expand their product market and gain popularity both in the United States and overseas. The merger between British American and Reynolds is subject to minimal antitrust review, as the former holds few assets in the United States while the latter is almost exclusively an American tobacco company, headquartered in Winston-Salem, North Carolina.
The U.S. tobacco industry has expanded modestly over the past fifteen years, as total retail sales within the industry have increased from $71 billion in 2001 to $94 billion in 2015. Individual companies have expressed greater awareness over health concerns and have been modifying their products, pursuing and adopting alternatives to traditional smoking, such as e-cigarettes.
In addition to increasing output in the United States, British American and Reynolds will gain access to highly beneficial emerging markets. Up to 60 percent of the combined companies’ sales volume will come from emerging markets once the merger is completed. Reynolds, in particular, will gain access to lucrative markets in the Middle East, Africa, and Asia, where BAT has a strong presence. Unlike Reynolds, which has limited global presence confined only to North America, sales of British American Tobacco products comprise up to 50 percent of the market share in Latin America, 25 percent of the Middle Eastern market, and up to 20 percent in some regions of Europe.
The two tobacco firms have also had a longstanding relationship throughout the past decade, as BAT had been a shareholder of Reynolds since 2004. If the deal fails to meet expectations, either company would have the privilege of backing away and annulling the merger. In that case, both companies would be required to pay a $500 million breakup fee. Currently, however, the merger process is being realized successfully and will be completed within the next several months.
A version of this article appeared in the Tuesday, January 24th print edition.
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