British American Tobacco plans $47bn Reynolds merger

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British American Tobacco has offered to buy the shares of Reynolds American that it doesn’t already own for $47bn (£38.5bn) in a bid to create the world’s biggest tobacco company.

The maker of Lucky Strike and Rothman’s cigarettes offered $56.50 per share made up of $20bn cash and $27bn in shares, valuing Reynolds at $93bn – a 20 per cent premium on the last closing price. The UK company already owns a 42.2 per cent stake in the maker of the Camel brand.

BAT expects the combined company to make $400m in cost savings, but said it could not confirm this because it has not been able to conduct prior negotiation as US securities laws require the prompt announcement of deals.

BAT said the proposal would give it: “A significant presence in high-growth emerging markets across South America, Africa, the Middle East and Asia, together with the most attractive developed markets.”

The London-based tobacco giant also hopes the deal will help it dominate the fast-growing market for “next generation products”, such as e-cigarettes.

BAT shares rose 3 per cent on Friday morning after the offer was announced.

BAT chief executive Nicandro Durante said: “We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the US market.

“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.“

Guy Ellison, head of UK equities at Investec Wealth & Investment, said: “The timing is a surprise, but the strategic rationale makes perfect sense, pivoting BAT further towards the high-value US market, consolidating some strong brands and Reynold’s position in next generation tobacco. Despite relatively modest synergies, the deal is still seen adding value for shareholders in the first full-year after completion. The ball is now in the court of Reynold’s board and shareholders to consider the offer.”

RJ Reynolds is the second biggest tobacco company in the US after Pilip Morris owner, Altria.