• by Thom Forbes , January 17, 2017

British American Tobacco this morning agreed to pay $49.4 billion for the 58% of Reynolds American Inc. it does not already own, making it the second-largest tobacco company in the world after U.K.-based Imperial Tobacco Group, the outright owner of heritage brands such as Newport, Pall Mall and Camel, and a singular force in the emerging e-cig business.

The merger, if approved, “will create a stronger, global tobacco and NGP (next generation products) business with direct access for our products across the most attractive markets in the world,” BAT CEO Nicandro Durante says in the release announcing the deal.

It will also allow the combined company to “benefit from utilizing the best talent from both organizations,” Durante continues, which no doubt means people will be losing their jobs. BAT projects $400 million in annualized “cost synergies” by the end of the third year — presumably including savings in marketing expenditures. 

The agreement comes after months of negotiations following BAT’s initial offer to take over the company in October, which was rejected, and represents a 26% increase based on the price of the stock and the change in the dollar-sterling exchange rate. BAT has been a minority owner since 2004.

“Analysts have said the takeover could spark further deals as Philip Morris International and Japan Tobacco jostle for market share in an industry that is shrinking in the West as more people quit smoking,” points out Reuters’ Paul Sandle.

Still, the United States remains the most profitable tobacco market in the world, except for China, according to BAT, and Reynolds is the No. 2 player in the market, after Altria’s Philip Morris USA, with a 34% share.

“The U.S. market has come a long way since 1998 when a landmark tobacco settlement hit cigarette makers with huge legal liabilities that led to $200 billion in costs over the years. More recently, tobacco companies have pushed through price hikes, and the industry’s steady dividends have lured investors amid low-interest rates. Follow-on litigation after the 1998 settlement hasn’t been as damaging as expected,” observes Saabira Chaudhuri for the Wall Street Journal. 

“If the deal secures shareholder and regulatory approval, it will bring BAT back to the U.S. market more than a decade after it folded its U.S. subsidiary, Brown & Williamson, into Reynolds in exchange for a large minority stake,” report Lauren Fedor and Mehreen Khan for Financial Times.

On a conference call with analysts today, BAT singled out the desirability of conducting business in the U.S. with its “affordable pack prices, high disposable income and a burgeoning market for e-cigarettes and other alternative products.”  

“This is a big move that makes a lot of sense for BAT,” Steve Clayton, a fund manager at Hargreaves Lansdown tells the AP’s Danica Kirka. “They already had billions tied up in Reynolds, now they will have billions more, but with full control of the company and its cash flows. The United States is an attractive market, with good pricing dynamics, and BAT can also take Reynolds' portfolio of new generation tobacco products and sell them worldwide.”

On the chest-thumping front, “the proposed deal would be the biggest overseas takeover by a British firm for years and undermines claims that Britain’s vote to leave the European Union has shattered business confidence,” write Hugo Duncan and James Burton for the Daily Mail.

BAT markets brands such as Dunhill, Rothmans and that quintessentially American brand, Lucky Strike, which it has had since its acquisition of American Tobacco Company in 1976.

“Hammering out the terms of an improved deal has been a slow process for the cigarette makers, complicated by uncertainty created by Donald Trump’s election,” observe Thomas Mulier and Sam Chambers for Bloomberg. “With agreement in place, the companies can move forward with a combination that marks the latest stage in a wave of consolidation for the tobacco industry, which is struggling with shrinking demand for traditional cigarettes and an uncertain pathway to new, potentially less harmful technologies.”

But the companies already “are close partners on vapor technology innovation,” Mulier and Chambers write, and BAT will “gain access to Reynolds’s leading electronic-cigarette position including the Vuse brand.”

Earlier this month, Reuters' Martinne Geller reported that BAT “has quit plans to market a nicotine inhaler called Voke to focus on consumer items like e-cigarettes rather than health products.” Voke “was the first product approved by Britain's drug regulator to be prescribed as a medical aid to quit smoking” and “will now be marketed by BAT's partner Kind Consumer, which originally developed the product.”