Reynolds'' Final Selling Price Rises To $54.5 Billion

Source from:  Winston-Salem Journal 06/20/2017

The final selling price of $54.5 billion for Reynolds American Inc. will be 10.3 percent sweeter for shareholders than previously disclosed.

That’s according to a British American Tobacco Plc regulatory filing, submitted Thursday, that’s tied into the setting of the companies’ July 19 shareholder votes.

The purchase price is $5.1 billion higher than the $49.4 billion the companies cited on Jan. 17, when Reynolds’ independent board of directors accepted BAT’s offer for the 57.8 percent of Reynolds that BAT did not already own.

BAT acquired a 42.2 percent stake in Reynolds in July 2004 as part of selling U.S. subsidiary Brown & Williamson Tobacco Corp. to Reynolds for $4.4 billion.

The purchase price represents an overall 39.5 percent premium — worth $7.5 billion — over the value of Reynolds’ share price on Oct. 20. The next day, BAT publicly disclosed its offer for the remaining Reynolds shares.

British corporate regulatory policies tend to require more financial disclosures than the U.S. Securities and Exchange Commission. Thursday’s disclosure was in the form of a shareholder letter from Chief Executive Nicandro Durante.

The companies have set simultaneous shareholder votes: 2 p.m. in London and 9 a.m. in Winston-Salem.

BAT shareholders also will vote on approving issuing of up to 435.56 million new shares, which will comprise 17.7 percent of the company’s 2.46 billion outstanding shares. Overall, legacy Reynolds shareholders would own 19 percent of BAT. Three current Reynolds board members would join the BAT board.

If both shareholder groups approve the deal, Reynolds is projected to become a U.S. subsidiary of BAT on July 25. There is a $1 billion break-up fee for both companies.

Reynolds shareholders will receive $29.44 in cash and 0.5260 in new BAT shares — in the form of an American Depository share — for each Reynolds share they own. According to Investopedia, an ADR is a stock that trades in the U.S. but represents a specified number of shares in a foreign corporation.

BAT plans to pay for the purchase through $24.4 billion in cash and $30.1 billion in the new BAT shares.

BAT said a combined BAT-Reynolds would have had $30.35 billion in revenue in 2016, representing $18.8 billion from BAT and $11.75 billion from Reynolds. Net profit would have been a combined $27.98 billion.

Part of how Durante attempted to sell BAT shareholders on the deal is that the United States “is the world’s largest tobacco profit pool, excluding China.”

“Over the last five years, (it) has grown revenue per pack at a faster rate than other developed markets. Long-term growth prospects are underpinned by affordable pack prices, relatively high disposable incomes, and a growing market for next generation products,” such as electronic cigarettes and heat-not-burn traditional cigarettes.

He cited BAT being able to have worldwide ownership of Pall Mall, Reynolds’ top discount brand, as well as Newport, the top-selling U.S menthol brand and No. 2 overall brand.

Reynolds is estimated to have between 2,000 and 2,200 local employees, the majority of whom work at its Tobaccoville plant.

BAT said in a Jan. 18 regulatory filing that it “has no plans to close or move the head office in Winston-Salem, nor make any significant changes to the current high-quality manufacturing facilities in North Carolina and Tennessee, nor to the trade marketing team.”

Durante said in the letter that BAT continues to project $400 million in cost savings by July 2020. That includes eliminating duplicate corporate functions, greater supply chain economies of scale and enhanced manufacturing efficiency from Reynolds’ 2-million-square-foot Tobaccoville plant.

“The board is confident that the integration of Reynolds American can be achieved without causing any material disruption to the underlying operations of the two businesses,” Durante said.

That includes leaving Debra Crew as Reynolds’ chief executive. Crew took over that role on Jan. 1, with Susan Cameron sliding into what became in April a non-executive chairwoman role. Enditem