Reynolds-BAT Acquisition Speculation Swirls After British News Report

Source from:  Winston-Salem Journal 03/08/2016

Another wave of speculation about Reynolds American Inc. and British American Tobacco Ltd. is swirling after a London newspaper's report citing BAT's preparations for an acquisition.

The Daily Telegraph reported Monday that BAT has engaged financial advisers USB, Deustche Bank and Centerview - steps typically taken when BAT is eyeing a deal.

However, there's also been speculation since late November that BAT is a potential suitor for Imperial Brands PLC, which operates ITG Brands LLC and its Greensboro operations.

"We do not comment on rumors or speculation," Reynolds spokesman David Howard said.

BAT has owned 42 percent of Reynolds since July 2004 as part of Reynolds $4.4 billion purchase of BAT's U.S. subsidiary Brown & Williamson Tobacco Corp.

Because there was a 10-year moratorium on BAT buying additional Reynolds stock, there had been talk for a decade that BAT might acquire at least a majority ownership of Reynolds after the moratorium expired and then convert Reynolds into a U.S. subsidiary.

As part of Reynolds' $29.25 billion deal for Lorillard Inc. - essentially to buy top-selling menthol brand Newport - BAT spent $4.7 billion on new Reynolds stock to keep its stake at 42 percent. Legacy Lorillard shareholders own 15 percent of Reynolds.

Centerview played a negotiating role in the four-way transaction that also included Imperial spending $7.1 billion to buy four traditional cigarette brand and blu eCigs from Reynolds and Lorillard.

Given BAT's most recent investment, The Daily Telegraph set a potential buyout price of $50 billion.

With Reynolds having 1.43 billion outstanding shares, and BAT owning 602 million shares, BAT would have to offer about $60.50 a share to reach the $50 billion mark.

Reynolds' share price has ranged between $33.71 and $52.25 the past 52 weeks.

"It is unwise to chase rumors such as this, even when they seem to have at least a kernel of truth to them," said John Abbink, a contributing analyst to Seeking Alpha financial research firm. "On the other hand, it is also unwise to ignore them entirely. BAT certainly seems to be up to something, and the lessons it learned from its ill-fated diversifications in the 1980s strongly suggest that, whatever it is, it will be within the tobacco business."

Some analysts question whether BAT is in a position to purchase Imperial or the rest of Reynolds since in the past year it also spent $2.45 billion to buy out Brazilian subsidiary Souza Cruz.

There were parallel rumor tracts of Reynolds buying Lorillard and BAT buying at least majority ownership of Reynolds during the spring and early summer of 2014.

As to continued speculation that BAT may acquire a majority ownership in Reynolds, Wells Fargo Securities analyst Bonnie Herzog said in December "the strategic (vapor) partnership the companies are pursuing is the best of both worlds, and there is value created for shareholders whether or not Reynolds and BAT eventually combine."

However, Herzog also said Reynolds' acquisition of Newport could "set the foundation for BAT to possibly acquire Reynolds in a few years."

According to Herzog, as well as media reports in Europe, Imperial is being projected as the last consolidation piece in the global tobacco market.

Imperial acquired the bulk of Lorillard's operations, including a Greensboro workforce of about 1,700 and about 2,900 overall. Enditem