London-based British American Tobacco’s $47 billion bid for Reynolds American Inc. would create the world’s largest tobacco company by revenue and market value, according to Friday’s SEC filing.
BAT owns 42.2 percent of Winston Salem-based Reynolds and is bidding to acquire the remaining 57.8 percent at $56.50 per share, representing a roughly 20 percent premium to Reynolds’ closing price Thursday. Analysts expect negotiations could lead to a higher offer price.
BAT could have bought the company last year when Reynolds shares were trading at less than half of recent levels.
Reynolds’ shares have fallen about 7.5 percent, and BAT’s shares have jumped 13 percent since Britain’s June vote to leave the European Union, bringing the companies’ price-to-earnings ratios closer.
That, coupled with low interest rates, which make borrowing money to fund a takeover cheaper, could explain the timing of the deal.
International tobacco companies, facing declining cigarette volumes and expanding regulations, are returning to the U.S. after years of distancing themselves because of civil suits.
That’s partly because free-speech rights under the First Amendment protect U.S. tobacco companies from recent plain packaging laws in the U.K. and other European countries, which mandate that cigarettes must be sold in packages without signature logos and colors, like those that appear on Marlboro Red.
Analysts say that Reynolds and Richmond-based Altria Group are using pricing power to offset declining cigarette volumes. The two companies have more than 80 percent of the U.S. cigarette market.
Last year Reynolds acquired Lorillard Inc. in a $25 billion deal, prompting it to sell its Kool, Salem and Winston cigarette brands and Lorillard’s Maverick brand to U.K.-based Imperial Brands for $7.1 billion.
Reynolds’ emerged as a stronger brand after it acquired Lorillard’s menthol brand Newport in the deal. Smokers under 30 years old are increasingly opting for minty-flavored cigarettes like those offered by Newport over traditional smokes.
Newport accounted for almost all of Lorillard’s $7 billion in sales in 2014.
Under Reynolds, Newport has increased its market share to 13.9 percent from 13.4 percent in June 2015. Those gains have added about $200 million in quarterly incremental revenue to the company’s balance sheet, according to Wells Fargo.
Newport’s performance helped make Reynolds a key player in the U.S. tobacco industry’s 10 percent increase in profit last year, according to analyst Vivien Azer of Cowen and Co.
BAT’s deal for Reynolds would make it a major player in “one of the best profit pools in global tobacco,” Azer said.
BAT, the world’s second largest publicly traded tobacco company by volume, behind Philip Morris International Inc., owns cigarette brands such as Dunhill and Lucky Strike. Reynolds owns Camel and Newport.
BAT’s offer comes at a time of transition for Reynolds, as chief executive officer Susan Cameron announced last week that she will pass the reins to former PepsiCo Inc. executive Debra Crew next year.
BAT shares decreased almost 3 percent Friday, opening at $4,905 and closing at $4,663.50.
Reynolds American was up 15 percent at $54.33 from Thursday’s close at $47.17.
