British American Tobacco plc (LON:BATS) (LSE:BATS.L) has announced it has agreed the terms of an offer for the remaining 57.8% of Reynolds American, Inc. (NYSE:RAI) which it does not own. It has been unanimously approved by the Transaction Committee of independent Reynolds directors put in place to consider the offer, as well as the Boards of the two companies.
Reynolds shareholders will receive $29.44 in cash and 0.5260 British American Tobacco shares for every 1 share they hold in Reynolds. Based on British American Tobacco’s share price on 16 January 2017, this implies a total valuation of $59.64 per Reynolds share, with a total consideration of $49.4 billion. This is a premium of 26% over the closing price of Reynolds on 20 October 2016, which is the day before British American Tobacco’s announcement of its proposal.
The deal could be a good one for the two companies in my view. It should create a well balanced company which has a diversified portfolio in higher growth, emerging markets as well as in more established markets such as the US. It should deliver at least $400 million in annualised cost synergies by the end of year 3, while the enhanced financial strength of the new business could deliver greater gains within the increasingly fast paced and innovative reduced risk product (RRP) market.
In the last year British American Tobacco has risen by 32%. That’s ahead of other consumer goods companies such as Imperial Brands PLC (LON:IMB) (LSE:IMB.L), Unilever plc (LON:ULVR) (LSE:ULVR.L), Diageo plc (LON:DGE) (LSE:DGE.L) and Altria Group Inc (NYSE:MO). Imperial Brands is up 3%, Unilever has risen by 21%, Altria has gained 18% and Diageo is 22% higher than a year ago.
In my opinion, today’s news is positive for British American Tobacco. Synergies should improve cash flow and provide more capital for investment in RRPs, while the improved diversification of the company may reduce its risk profile. I believe the new entity will perform well on a relative basis and I feel it has investment appeal for the long term.