Reynolds Completes $5B Sale of International Rights to Super-premium Brand

Source from:  Winston-Salem Journal 01/15/2016

Reynolds American Inc. has exited the global tobacco marketplace - again - with Wednesday's completion of selling the international rights to Natural American Spirit for $5 billion in cash to Japan Tobacco Group.

Natural American, made by Reynolds subsidiary Santa Fe Natural Tobacco Co., is the top-selling U.S. super-premium brand and a Top 10 traditional-cigarette brand.

Reynolds said "the international rights to nearly all of its operating companies' cigarette trademarks are now owned by international tobacco companies, allowing the companies to focus on brand growth in the U.S. market." Reynolds retains the right to sell Natural American in U.S. duty-free locations, U.S. territories or in U.S. military outlets.

The deal, announced Sept. 29, represents both companies turning for the second time in 17 years to a tried-and-true strategy of trading debt relief for international brand expansion.

The need for debt relief comes this time from Reynolds spending $29.25 billion to buy Lorillard Inc., essentially to gain ownership of Newport, the top-selling U.S. menthol brand and No. 2 traditional cigarette. Reynolds also took on $3.5 billion in Lorillard debt.

As part of that megadeal, which closed June 12, Reynolds received $7.1 billion from Imperial Tobacco Group PLC for its purchase of four cigarette brands and blu eCigs, as well as $4.7 billion from British American Tobacco Ltd. from buying new Reynolds shares to maintain its 42 percent ownership stake.

Analysts project Reynolds will reap $3.5 billion after taxes from selling the international rights to Santa Fe.

During an investors' presentation Aug. 3, Andrew Gilchrist, Reynolds' chief financial officer, said the company's $17.6 billion of overall long-term debt "is manageable" not only because the company added Newport revenue, but also because its loans have an average interest rate of 4.5 percent and an average maturity of 12.4 years.

Even so, Gilchrist said, Reynolds is focused on deleveraging the debt as quickly as possible.

In 1999, R.J. Reynolds sold the international rights to its cigarette brands, including Camel and Winston, to Japan Tobacco for $8 billion. It also retained the same U.S. territory markets.

That deal cut Reynolds' remaining debt burden from the $25 billion leverage buyout of 1988-89 from $6.5 billion to $1 billion.

The deal includes the global companies that sell and distribute Natural American, an employee base of 280 in Europe and Japan.

The top international markets for the brand are Germany, Japan and Switzerland. Natural American sold 3.1 billion cigarettes and had $160 million in international sales during 2014.

Reynolds and Japan Tobacco each emphasized the appeal of Natural American being additive-free and organic.

That claim, however, is under challenge by the U.S. Food and Drug Administration, which sent warning letters Aug. 27 to Reynolds and Santa Fe that said advertising traditional cigarette products as "additive free" or "natural" is in violation of federal regulations.

Reynolds spokesman David Howard said Wednesday the company had no update on its talks with the FDA.

Santa Fe emphasized the additive-free element of Natural American when it introduced the cigarette in 1982, well before Reynolds bought the company for $340 million in December 2001. Enditem