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NW Brown: British American Tobacco eyes return to US market - but could the deal go up in smoke?

PUBLISHED: 10:45 26 October 2016 | UPDATED: 10:55 26 October 2016

Oliver Phillips, NW Brown Investment Management Director

Oliver Phillips, NW Brown Investment Management Director

Archant

This week I am looking at British American Tobacco (BAT) Plc - the London-based tobacco giant which has offered to take over US tobacco firm Reynolds American for $47bn.

BAT already owns 42.2% of the American company through a previous deal and it is looking to acquire the remaining 57.8%. The offer values Reynolds American at $56.50 a share, of which $24.13 would be paid in cash and the remainder in BAT shares. This cash-and-stock deal would mark the return of BAT to the lucrative but highly regulated US market after a 12-year absence.

BAT expects the deal to generate cost savings of around $400m. Part of these synergies will come from uniting each company’s efforts in the fast-developing world of e-cigarettes, which are perceived as less dangerous than smoking.

The acquisition will also give BAT access to more premium brands, such as Camel, which it can sell in countries where demand for Western cigarettes is growing.

However, BAT will have a series of hurdles to overcome in order for this deal to be successful. Firstly, the offer will be carefully examined by the independent board members of Reynolds American who may seek to negotiate a higher price. Secondly, the deal will no doubt be scrutinised by regulators to ensure market integrity. Lastly, ratings agencies Fitch and Moody’s have warned the debt required to fund this deal could lead to a downgrade of BAT’s debt rating.

While the deal is not without risks, the opportunity does look attractive.

Oliver Phillips is chief operating officer and investment manager at NW Brown.

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