British American Tobacco (LSE: BATS) has agreed to acquire the 57.8% stake in Reynolds American (NYSE: RAI) that it doesn’t already own, representing a $49.4 billion transaction. The deal values Reynolds at north of $85 billion, with BAT effectively paying $59.64 for each outstanding share—$29.44 in cash and about 0.5260 of a BAT ordinary share—for a 26.4% premium to Reynolds' closing price on October 20, the day prior to BAT’s initial proposal. BAT has targeted annual savings of $400 million within the first three years, with the transaction expected to close during 3Q.
The companies hope that a combined portfolio of iconic cigarette brands like Lucky Strike, Camel, Newport and Pall Mall, as well as a larger collective foothold in the market for vapor and tobacco-heating products like Vuse, will drive growth. The merger should also spur further consolidation in the industry as it continues to shift from developed to developing markets, putting pressure on rival Philip Morris (NYSE: PM) to maintain its global market share in cigarettes—14.6% as of 2016, according to Statista. With the Reynolds pickup, BAT reportedly moves from a 10.7% to a 12.6% share.
The pace of completed M&A deals in the cigarettes/tobacco space fell about a third during 2016, from the previous year’s high of 31 completed transactions in 2015, according to the PitchBook Platform.
The relationship between BAT and Reynolds began in 2004, when the merger of BAT’s subsidiary Brown & Williamson with R.J. Reynolds created Reynolds American. BAT offered to buy Reynolds for $47 billion late last year, but the takeover offer was rejected.
The new deal will increase the new company's presence in South America, the Middle East, Asia and Africa, with developing markets comprising some 60% of its overall footprint by volume, a BAT spokesperson told The Wall Street Journal. The cash component of the transaction will be financed by a combination of existing cash resources, new bank credit lines and the issuance of new bonds. A $25 billion acquisition facility has been entered into with a syndicate of banks.
BAT shares closed at £45.80, a loss of 3.83% on the news, while Reynolds' shares closed up 3% at $57.68 apiece.