What's going on?
London-based British American Tobacco (BAT) has offered to buy US-based Reynolds American in a tie-up that would create the world’s biggest tobacco company. E-cigarettes have something to do with it…
What does this mean?
Reynolds sells cigarettes in the US, while BAT sells them pretty much everywhere else. From that standpoint, the combination seems to make sense. Also, BAT has owned about 40% of Reynolds since 2004. It’s now making an offer to buy the rest of Reynolds. So far, Reynolds has simply said that they will consider the offer and get back to BAT. Most investors seem to think that Reynolds will accept a deal, but perhaps only at a higher price.
Why should I care?
For the stock: BAT wants access to a more profitable market – and better technology.
The combined company would give BAT access to the US cigarette market, which is the most profitable in the world (i.e. for every $1 spent on cigarettes in the US, the tobacco companies make more profit than anywhere else). Also, the deal would give BAT the full benefit of Reynolds’ well-established research and development pipeline so that it can better develop innovative smoking devices, like e-cigarettes, which are chipping away at sales of traditional cigarettes. However, BAT’s stock sold off almost 3% after the offer was announced – so perhaps investors are afraid that the benefits won’t be worth the cost.
The bigger picture: If this deal goes through, it could lead to another big takeover in the tobacco industry.
Research analysts at Wells Fargo immediately said that a BAT-Reynolds tie-up would increase the likelihood that Philips Morris would look to purchase Altria, a major rival of Reynolds in the US tobacco market. Like many industries, it looks like tobacco companies are buying one another to try to improve profits – or at least stop them from declining.