BAT Considers Tobacco Mega-deal in the US

Source from:  iNVEZZ‎.com 07/18/2014

The Times today reported that British American Tobacco Plc (LON:BATS), the UK's largest tobacco company, has hired bankers to advise on multibillion-pound acquisition opportunities in America, including possible deals with Reynolds American and Lorillard Tobacco Company.

The paper cited unnamed 'City sources', according to whom, the tobacco giant has asked Deutsche Bank to work alongside its long-standing financial adviser UBS on how it should pursue and finance deals in the US. The sources said that British American Tobacco (BAT) had been looking at options for potential US acquisitions since late last year.

In today's trading, BAT shares rose 1.3 percent to 3,461.50p as of 14:21 BST. The company's stock has advanced some seven percent since the start of the year.

Speculation about BAT's interest in US deals arises just months before the end of a contract between the British firm and America's second-largest tobacco company, Reynolds American. BAT acquired a 42-percent stake in its US peer a decade ago, signing an agreement not to make a hostile offer. The agreement, however, ends this July, which, it seems, has prompted the British firm into studying its acquisition options across the Atlantic.

One such option for BAT is to make an offer for the rest of Reynolds. Another one is to green light an acquisition by Reynolds of Lorillard, the maker of Newport menthol cigarettes. The second option also involves BAT's purchase of some of Lorillard's brands.

The three-way transaction, however, is more complicated, as BAT could be forced to sell brands to rivals due to competition barriers. The prevalent view in the City is that buying Reynolds and then launching a potential takeover bid of Lorillard is a better option for the UK tobacco giant.

Slowing growth

Regardless of which option, BAT chooses to pursue, it would likely be the firm's biggest tobacco deal in years, given Reynolds' and Lorillard's market values of $31 billion and $21.5 billion, respectively. Some analysts have suggested that the company may be planning to use a huge acquisition to offset slowing growth over the next few years.

The Times quoted Citigroup's Adam Spielman as observing: "BAT management may explore growth options creatively, given we forecast earnings per share will fall about 3 per cent in 2014 due to foreign exchange . . . it is quite likely that BAT does buy the rest of Reynolds fairly soon."

According to some analysts, BAT had also been looking at a third US-based company. Enditem