British American Tobacco (FTSE:BATS) has announced plans to buy the 58% stake in rival American company Reynolds.
The proposed $47 billion deal is made up of a combination of cash and BAT stock valuing Reynolds at $56.60 per share. This represents a premium of roughly 20% to Reynolds closing price on Thursday.
BAT has held a significant holding in the company since combining its US business (Brown and Williamson) with that of R J Reynolds Tobacco Company 2004. This left the FTSE 100 Company owning a 42.2% share of the Reynolds American Tobacco group.
The deal would bring together two of the tobacco industry’s giants. Increased cost synergies and a diversification of profit growth as key drivers behind the move. It would in addition place several of the tobacco industry’s biggest brands under the single company. Most notably these include Camel, Newport Pall Mall, Kent, Dunhill, Lucky Strike and American Spirit.
Operational benefits from the merger are also expected. BAT is looking to increase its presence in key emerging markets as it seeks further diversification of its operations. Target areas include the growing markets of South America, Africa, Asia and the Middle East.
The deal, yet to be approved by the US company’s independent directors, would see the combined company become the largest listed tobacco group by sales.
This latest move follows increased consolidation within the sector. Last year Reynolds itself completed a $25 billion takeover of US rival Lorillard. Following regulatory approval the deal went through facilitated by the sale of several existing assets. Kool, Sale and Winston brands were sold to rival Imperial Tobacco Group for $7.1 billion.
On Friday BAT released its results for the first nine months of the year. These showed revenue increasing 8.1% over the period and 10.2% on a year to year basis. Although market conditions were described as ‘challenging’ the figures were helped by Sterling weakness.
Shares in BAT stock were nearly 3% higher at the opening bell at £49.40.
The synergies available in what is a fairly economically resilient market sector make BAT stock look attractive. A break above the £50.00 share level key. Trading a binary options contract higher than this level could yield results on a longer term view. However the gap on the chart might indicator a retest of the £48.00 level in the near term.