21 October 2016 – British American Tobacco p.l.c. (“BAT”), which owns 42.2% of Reynolds American Inc. (“Reynolds”), has made a proposal to merge with Reynolds through the acquisition of the remaining 57.8% in the company. US securities laws require BAT to announce its merger proposal promptly after it was made to the Board of Reynolds. As a result, BAT has been unable to have prior negotiations with Reynolds regarding the proposal.
BAT’s proposal to merge with Reynolds:
- Values Reynolds at $56.50 per share, of which $24.13 would be in cash and $32.37 would be in BAT shares.1
- Represents a premium of 20% over the closing price of Reynolds common stock on 20 October 2016.
This would create a stronger, truly global tobacco and Next Generation Products (“NGP”) company with:
- A leading position in the US tobacco market, the largest global profit pool (ex-China) with strong growth dynamics.
- A significant presence in high growth emerging markets across South America, Africa, the Middle East and Asia, together with the most attractive developed markets.
- A unique portfolio of strong brands, bringing together ownership of Newport, Kent and Pall Mall.
- Combined Next Generation Products and R&D capabilities to deliver a world class pipeline of vapour and tobacco heating products across all the fastest growing NGP markets globally.
- Creating the world’s largest listed tobacco company by net turnover and operating profit.
There is a strong financial rationale for the transaction that supports long-term delivery for all stakeholders:
- This is a premium offer, supported by modest cost synergies, with a significant share consideration enabling participation in the long-term benefits.
- It is earnings accretive in the first full year.
- It is expected to be accretive to dividends per share.
- The transaction would create a broader, larger business, delivering more diversified sources of profit growth.
- The combined company would maintain a strong financial profile, with a target of maintaining a solid investment grade credit rating and enhanced cash generation.
Key terms of proposed transaction
The proposed transaction would be effected through a US statutory merger in which Reynolds shareholders, other than BAT, would receive $24.13 in cash and 0.5502 BAT shares for each of their Reynolds shares.
The total consideration for the remaining 57.8% of Reynolds would be $47 billion, of which approximately $20 billion would be in cash and $27 billion in BAT shares.
The Proposal represents a premium of 20% over the closing price of Reynolds common stock on 20 October 2016 and an Enterprise Value of $93 billion which, based on reported LTM EBITDA to 30 September 2016 represents a multiple of 16.3x.
The proposed merger is subject to endorsement of Reynolds’s independent directors (not designated by BAT) and approval by BAT and Reynolds shareholders.
BAT’s Chief Executive, Nicandro Durante commented:
“We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the US market. The acquisition of Lorillard in 2015 has further strengthened Reynolds’s business. 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.”
The BAT Board is committed to maintaining a solid investment grade credit rating. The cash component of the merger would be financed by a combination of existing cash resources, new bank credit lines and the issuance of new bonds.
The combined Group would be the world’s largest listed tobacco and Next Generation Products business by net turnover and operating profit with exposure to both cash generative developed and high growth developing markets, giving a unique capacity to exploit industry opportunities as they develop.
The cost synergies associated with the proposed merger are estimated by BAT to be relatively modest at around $400 million, however this would need to be verified following engagement with Reynolds.
Under the long-standing Governance Agreement between Reynolds and BAT, the proposed merger must be approved by the independent directors of Reynolds not designated by BAT (the “Other Directors”). BAT will not pursue its proposal without this endorsement. The proposal is also subject to the completion of limited confirmatory due diligence and the negotiation and execution of definitive transaction documents mutually acceptable to and approved by the Boards of BAT and Reynolds. The consummation of any merger would further be subject to regulatory approvals and shareholder approvals, including the approval by a majority of the votes cast on the proposed merger by holders of the Reynolds shares not owned by BAT or its subsidiaries and approval by BAT’s shareholders, and other customary conditions. The proposed merger would not be subject to any financing conditions.
BAT’s existing manufacturing footprint would be enhanced by the inclusion of Reynolds’s high quality production facility in Tobaccoville, North Carolina.
There can be no assurance that BAT’s proposal or any transaction with BAT will be acceptable to the Other Directors or Reynolds’s Board, or that if such proposed transaction is acceptable, that the conditions to a proposed transaction would be satisfied or that a transaction will be consummated.
The Board of BAT intends to register BAT under the US securities laws in connection with the proposed transaction. As part of the SEC registration process, BAT and its auditors will need to satisfy the SEC that they are complying with the applicable US auditing requirements which differ in some respects from those in the UK.
As BAT is a significant existing shareholder of Reynolds, US securities laws require BAT to announce publicly its merger proposal to Reynolds by promptly filing an amendment to BAT’s Schedule 13-D.
To view the letter BAT sent to the Board of Reynolds on 20 October 2016 detailing the merger proposal, please paste the following URL into the address bar of your browser.