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What's going on?

British American Tobacco (BAT), the giant tobacco company based in London, has agreed to buy its American cousin, Reynolds American, in a deal worth almost $50 billion! (tweet this)

What does this mean?

BAT, which already owns about 44% of Reynolds, initially offered to buy the rest of the company back in October. As appeared likely at the time, it was only the opening salvo in the negotiations – and ultimately a deal was struck at a moderately higher price. The takeover will create the world’s biggest tobacco company!

Why should I care?

For the stocks: BAT is looking for a US presence and faster innovation.

There are some classic “synergies” in this deal (e.g. cutting expenses due to the companies’ overlapping costs), but this deal is about more than just the usual benefits. For one, the US cigarette market remains one of the world’s biggest – and BAT wants a presence in it as it faces falling cigarette sales and higher restrictions in other parts of the world (e.g. “plain packaging” laws in the UK). Perhaps most importantly, Reynolds is a leader in the development of e-cigarettes and other vaping products, which is the one major part of the tobacco industry that is growing.

The bigger picture: Investors will now focus on whether Philip Morris will buy Altria.

In the 2000s, both BAT and rival Philip Morris turned their US operations into separate companies (Altria was the equivalent of Reynolds for Philip Morris). The idea was to protect their international businesses from US litigation risk since there were lots of lawsuits against US tobacco companies and, by formally separating them out, only the US companies were exposed to that risk. This also allowed the international firms to focus on growth outside of America. But the industry dynamics have changed and the logic that applies to the BAT/Reynolds deal is similar to the arguments in favor of Philip Morris buying Altria.

Originally posted as part of the Finimize daily email.

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