BATS British American Tobacco

Etude l' AG du 19/07/2017

 Item 1: To approve the acquisition of Reynolds American Inc.
On 17 January 2017, the Company announced that it and Reynolds American Inc (Reynolds) had agreed the terms of a recommended offer for the acquisition, by a subsidiary of the Company, of the remaining 57.8% of the common stock of Reynolds, not already held by the Company, which will be effected through a statutory merger pursuant to the laws of North Carolina.  Owing to its size, the proposed acquisition constitutes a Class 1 transaction for the purposes of the Listing Rules, and therefore requires the approval of shareholders.
The proposed acquisition would result in the Company’s issued share capital increasing by approximately 21% through the issue of up to 435,556,670 new shares.  Following this share issue, the Company’s current shareholders will hold approximately 81% of the share capital of the combined group.
Based on the Company’s share price and the pound sterling-US dollar exchange rate as at market close on 12 June 2017, the purchase price implies a total current value of $54.5bn for the remaining 57.8% of Reynolds shares not owned by the Company, comprised of approximately $24.4bn in cash and $30.1bn in Company shares which will be represented by Company ADSs. As of the last practicable date, this represents a premium of 39.5% over the closing price of Reynolds shares on 20 October 2016.
The deal would mark the return of BAT into the US market after it exited in 2003 with the sale of Brown & Williamson to Reynolds partly due to exposure to US litigation costs (see State Settlement agreement in the following section). With a potential slowdown in Chinese tobacco consumption, BAT now believes that the benefits of re-establishing market share in the US outweigh the costs of US litigation. In 2015, BAT boasted US market share of 5.3% vs. almost 31.3% for RAI.
Although the transaction will increase BAT’s footprint in the US, boost its next-generation tobacco product offering, and potentially generate much needed synergies in a consolidating industry, the risks are significant.
The Company will significantly increase its debt burden, and with it, its financing costs will more than double assuming no rating downgrade. Moreover, with its current dividend policy, the ability to cover dividend payments through FCF will be called into question given the increase in financing costs. The acquisition also carries its fair share of litigation risks with almost $14.8 billion in settlement payments due through to 2021. Shareholders should also note that, at a multiple of 16.4 times EBITDA, the deal is quite expensive by historical standards.
Given limited disclosure on board changes, it is not possible to evaluate the potential impact on the governance of the company. 
 

03/07/2017
14 pages
EN

Research Provider

Proxinvest Subscriptions Available
Expert Corporate Governance Service (ECGS)

Founded in 1995, Proxinvest is an independent proxy firm supporting the engagement and proxy analysis processes of investors. Proxinvest mission is to analyse corporate governance practices and resolutions proposed at general meetings of listed firms.

Proxinvest main services are :

  • ​Proxy reports
  • Definition and monitoring of client customized voting guidelines
  • Corporate Governance Data and Rating
  • Thematic research
  • Engagement support

Proxinvest has been a pioneer and champion of good corporate governance and has grown into a recognised expert in the field.

Proxinvest is independently-owned and only works for investors : Proxinvest does not provide consulting services to the companies it covers, mitigating related risks to its clients and ensuring the independence of our analysis. As a result Proxinvest is able to take a robust, independent, engaged and unconflicted view of the companies in which our clients invest.

As Managing Partner of Expert Corprate Governance Service Ltd (ECGS), Proxinvest has built a large network of corporate governance experts to support clients in corporate governance analysis worldwide. 

Read more

Underlying

Consumer Non-Cyclical - United Kingdom
Visit British American Tobacco's profile page to view all their available research.

ResearchPool Subscriptions

Get the most out of your insights

Get in touch