BAT to take full control of Reynolds American for $49.4 bn

17 Jan 2017

British American Tobacco PLC has agreed to acquire 57.8 per cent of Reynolds American Inc that it does not own in a sweetened offer of $49.4 billion - a deal that will create the world's largest listed tobacco company by revenue and market value.

The transaction has been unanimously approved by the Transaction Committee of independent Reynolds directors established to evaluate the BAT offer. The transaction has also been approved by the boards of Reynolds and BAT.

Under the deal, Reynolds shareholders will receive for each Reynolds share $29.44 in cash and 0.5260 BAT ordinary shares, which will be in the form of BAT American Depository Receipts (ADRs) listed on the New York Stock Exchange

Based on BAT's share price and the dollar-sterling exchange rate as at market close on 16 January 20171, this implies a total current value of $59.64 per Reynolds share and a total current value of approximately $49.4 billion for the 57.8 per cent of Reynolds not already owned by BAT.

The offer represents a premium of 26 per cent over the closing price of Reynolds common stock on 20 October 2016 (being the last day prior to BAT's announcement of a proposal to merge with Reynolds)

NYSE-listed Level III ADRs representing BAT ordinary shares will be issued following registration under US securities laws.

The merger will create a stronger, truly global tobacco and next generation products NGP) company to deliver sustained long-term profit growth and returns with a balanced presence in high growth emerging markets and high profitability developed markets, combined with direct access to the attractive US market.

Besides bringing together a portfolio of strong, growing global brands such as Newport, Kent and Pall Mall, the combine will own a truly global NGP business, with a world class pipeline of vapour and tobacco heating products and access to the fastest growing NGP markets.

BAT expects the merger to bring at least $400 million in annualised cost synergies by the end of the third year of merger with continued margin improvement. EPS will be accretive in the first full year with mid-single digit EPS accretion in year 3, while enhancing cash generation with increased control of a significant proportion of group cash flows.

"We are very pleased to have reached an agreement with the Transaction Committee and Board of Reynolds and we look forward to putting the recommended offer to shareholders,'' BAT's chief executive, Nicandro Durante commented.

''Our combination with Reynolds will benefit from utilising the best talent from both organisations. It will create a stronger, global tobacco and NGP business with direct access for our products across the most attractive markets in the world. We believe this will drive continued, sustainable profit growth and returns for shareholders long into the future," he added.

Based on BAT's share price and the Dollar-Sterling exchange rate as at market close on 16 January 2017, the agreed terms represent a premium of: 26 per cent over the closing price of Reynolds common stock on 20 October 2016 (the last day prior to BAT's announcement of a proposal to merge with Reynolds) and a current Enterprise Value of $97 billion which, based on reported last 12 months EBITDA to 30 September 2016, represents an attractive multiple of 16.9.

BAT proposed to finance the cash component of the transaction through a combination of existing cash resources, new bank credit lines and the issuance of new bonds. It has entered into a $25 billion acquisition facility with a syndicate of banks to provide financing certainty. The acquisition facility comprises $15 billion and $5 billion bridge loans with 1 and 2-year maturities, respectively, each with two six month extensions available at BAT's option.
 
In addition, the facility includes two $2.5 billion term loans with maturities of 3 and 5 years. BAT intends to refinance the bridge loans through capital market debt issuances in due course.

BAT said the company is committed to maintaining a solid investment grade credit rating and intends to delever, targeting a net debt to EBITDA metric of around 3s by the end of 2019.

BAT anticipates taking actions to treat legacy Reynolds and BAT debt pari-passu.
 
Until completion Reynolds shareholders will remain entitled to Reynolds dividends payable in the ordinary course. Reynolds shareholders will be entitled to BAT dividends (with record dates following completion) in respect of their new BAT shares from the time of issuance of such shares.

BAT intends to register BAT ADRs under US securities laws. The transaction is a Class 1 transaction for BAT for the purposes of the UK Listing Rules requiring the approval of BAT shareholders.  A shareholder circular, together with notice of the relevant shareholder meeting, will be distributed to BAT shareholders in due course. The parties expect the transaction to close during Q3 2017.

It has been agreed that three of the non-BAT nominated Reynolds directors will join the Board of BAT at closing.

Both the BAT and the Reynolds' Boards will recommend the transaction to their respective shareholders. A break fee of up to $1 billion is payable by either BAT or Reynolds under certain circumstances. More information is provided in the Closing Conditions section.

Creates a stronger, truly global tobacco and Next Generation Products (''NGP'') company

Post transaction, the group will be a larger, broader, more geographically diversified business with a unique footprint providing continued exposure to high growth emerging markets, direct access to the opportunity in the US market, and a broad presence in key developed markets.