British American Tobacco (NYSEMKT: BTI) wants to buy the 58% of cigarette maker Reynolds American (NYSE: RAI) it doesn’t already own in a $47 billion merger that would dwarf Reynolds’ $25 billion acquisition of Lorillard last year. If approved, it would bring powerhouse brands such as Camel, Lucky Strike, Newport, and Pall Mall together in the world’s largest publicly traded tobacco company, with net sales exceeding those of Philip Morris International.
The suitor is offering Reynolds investors a 20% premium on their stock, based on Thursday’s closing price. It is bidding $56.50 per share, in a split of $24.13 in cash and $32.37 in BAT stock. Because British American Tobacco already owns 42% of Reynolds, there is little concern that antitrust issues of the type that hovered over the Lorillard deal will be raised.
To ease the way toward that acquisition, Reynolds agreed to divest certain brands and assets to Imperial Tobacco in a side agreement valued at $7.1 billion. Reynolds sold its Winston, Kool, and Salem brands, while Lorillard contributed its discount brand Maverick and its leading electronic cigarette blu eCig, as well as manufacturing facilities and guarantees of retail store shelf space.
The acquisition of Reynolds by British American would make the latter a real competitor to Altria in U.S. markets for the first time. But the two sides actually still have to negotiate first: BAT said it was required to announce its intent right away under U.S. regulations, and hadn’t discussed the proposal yet with Reynolds.
Because the two boards of directors are already amiable, it’s likely to be a friendly discussion of prices that shouldn’t result in any discord. Reynolds acknowledged it has received the offer, will take it under advisement, and respond accordingly.
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Rich Duprey has no position in any stocks mentioned.
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