British American Tobacco Takes Control of Reynolds for $49 Billion

British American Tobacco (BAT) has reached a deal to acquire Reynolds for $49 billion (£40 billion), successfully taking control of its American competitor and creating the world's largest publicly traded tobacco company.

BAT has been in negotiations with Reynolds for several months regarding the acquisition of the 57.8% stake it does not already own.

This merger will bring together some of the most famous brands in the tobacco industry, including Lucky Strike, Rothmans, Dunhill, and Camel cigarettes.

BAT stated that the merger "creates a stronger, truly global tobacco industry."

BAT has been a shareholder in Reynolds since 2004 and last year described the merger as "a logical progression in our relationship."

However, the initial approach from the British company was rejected by Reynolds, with a $47 billion offer turned down last November.

BAT estimates that the merger could save $400 million in costs.

Reynolds has been operating since 1875 and is the second-largest tobacco company in the U.S., which is owned by Philip Morris USA.

Last year, Reynolds completed a $25 billion acquisition of its U.S. rival Lorillard. The merged company was forced to divest some brands, including Kool, Salem, and Winston, to satisfy regulators. They were ultimately acquired by Imperial Brands for $7.1 billion.

BAT's products include Rothmans, Kool, and Kent, while Reynolds' brands include Newport, Camel, Pall Mall, Doral, Misty, and Capri.

The British company has over 200 brands and is a major player in the e-cigarette market. This acquisition will further solidify its position in the U.S. and give the merged business a significant presence in high-growth markets, including South America, the Middle East, and Africa.

More offers?

The bid includes $25 billion worth of BAT stock and $24.4 billion in cash, valuing the entire Reynolds business at over $85 billion. This sweet deal is 26% higher than Reynolds' closing price on October 20, when news of BAT's intention to gain full control of Reynolds emerged.

BAT's CEO Nicandro Durante said: "We have been shareholders in Reynolds since 2004, and we have benefited from the success of the current management team's strategy, including the acquisition of Lorillard, supported by our own investment in 2015."

"Our collaboration with Reynolds will benefit from leveraging the best talents from both organizations, creating a stronger global tobacco and NGP (Next Generation Products) business, with our products available in the most attractive markets worldwide."

Steve Clayton, a fund manager at Hargreaves Lansdown, said the acquisition is a "bold move" for BAT, but "makes sense."

However, he added: "We cannot ignore the debt that BAT is taking on to fund this deal, which makes the stock a bit risky in the short term, but tobacco is a very cash-generative business, and we expect the expanded group to pay down the debt quickly."

"The larger BAT becomes, the more pressure it puts on other players, and attention may shift to Imperial Brands, which is increasingly looking like a small fish swimming in a huge, hungry fish tank."