British American Tobacco plc (LON:BATS) (LSE:BATS.L) has announced an offer for the 57.8% of Reynolds American, Inc. (NYSE:RAI) which it does not currently own. The offer values Reynolds at $56.50 per share. This is a 20% premium to its closing share price on 20 October. British American Tobacco proposes to pay for the acquisition through a mixture of cash and shares. It proposes paying $24.13 in cash and 0.5502 shares of British American Tobacco for each Reynolds share.
British American Tobacco believes that bringing the two companies together would strengthen shareholder returns. The proposal is being made public soon after it was made to the Board of Reynolds as per US securities laws. The combined company would be the world’s largest tobacco and Next Generation Products business by net turnover. It would be larger than peers Imperial Brands PLC (LON:IMB), Altria Group Inc (NYSE:MO) and Philip Morris International Inc. (NYSE:PM).
The proposal is earnings accretive in the first full year and includes modest cost synergies. It is expected to result in an accretive dividend per share for shareholders. British American Tobacco’s strong financial position is due to be maintained, with a solid investment grade rating.
British American Tobacco also released a Q3 update today. Year-to-date revenue has risen by 8.1% at constant exchange rates, or 6.2% on an organic basis. Year-to-date cigarette volumes are 497 billion, which is an increase of 2.2% or 0.9% on an organic basis. Cigarette market share increased by 40 basis points in the first nine months of the year.
In 2016, British American Tobacco has outperformed UK-listed tobacco peer Imperial Brands, as well as other global consumer goods companies such as Unilever plc (LON:ULVR), Diageo plc (LON:DGE) and Reckitt Benckiser Group Plc (LON:RB). British American Tobacco has risen by 30%, Imperial Brands is up 10%, Unilever has gained 19%, Diageo has risen by 18% and Reckitt Benckiser has delivered capital gains of 14% in 2016.
In my view, the acquisition of the 57.8% of Reynolds by British American Tobacco could be a good move. It has the potential to create a more dominant business and deliver synergies. I also feel that tobacco could prove to be a good place to invest due to its relatively reliable earnings profile and the potential for uncertainty as US interest rate rises and the US election are set to take place.