British American Tobacco's (BAT) share price tumbled four per cent on Tuesday afternoon after it announced a deal to take over US competitor Reynolds.
After months of talks between the two firms, BAT has agreed to pay around $49.4bn (£40.8bn) for the 57.8 per cent of Reynolds that it does not already own.
Its shares jumped shortly after the announcement, but by the end of the day had tumbled four per cent to 4,575p.
[stockChart code="BATS" date="2017-01-17 17:00"]
Reynolds shares went in the opposite direction on Tuesday morning in the US, trading up 3.5 per cent to $57.91 at the time of writing.
BAT, the producer behind cigarette brands Dunhill, Lucky Strike and Benson & Hedges, first offered to buy the remainder of Reynolds, which owns Camel, in October last year.
Originally, BAT said the purchase could cost $47bn, an offer that was reportedly deemed too low – the deal was said to be off in November. However, in December it was revealed that the FTSE 100-listed cigarette firm was prepared to puff up its bid for the US group.
"We are very pleased to have reached an agreement with the transaction committee and board of Reynolds and we look forward to putting the recommended offer to shareholders," said BAT chief executive Nicandro Durante.
"We have been shareholders in Reynolds since 2004 and we have benefited from the success of the present management team's strategy, including its acquisition of Lorillard, which we supported with our own investment in 2015.
"BAT has consistently executed a winning strategy and has a proven track record of delivering strong results and returns for its shareholders while successfully investing for future growth. Our combination with Reynolds will benefit from utilising the best talent from both organisations."
Durante added that the combination will create a "stronger, global tobacco and NGP business with direct access for our products across the most attractive markets in the world".
We believe this will drive continued, sustainable profit growth and returns for shareholders long into the future.
What the analysts said
The BAT agreement marks one of the largest outbound UK deals ever. Mergermarket's Deane McRobie said:
The deal is among the largest-ever outbound deals by a UK-listed company, above an RBS-led consortium’s 2007 takeover of ABN Amro for £48bn but well below Vodafone’s 1999 acquisition of Mannesmann for £115bn.
BAT’s offer is seven per cent higher than the price on its first approach to Reynolds in October. The revised offer puts more cash on the table but has a smaller equity component than its opening bid, and its exact value will fluctuate with the bidder’s share price in the coming months.
Steve Clayton, a fund manager at Hargreaves Lansdown, said: “This is a big move, that makes a lot of sense for BAT.
“They already had billions tied up in Reynolds, now they will have billions more, but with full control of the company and its cash flows.”
RBC Capital Markets said in a note that the deal "makes sense strategically and operationally and just about washes its face financially".
Behind the deal
Nick Reid – Centerview Partners
Reid, a Bristol University graduate and qualified chartered accountant who joined the boutique from UBS in 2014, led a Centerview team advising BAT on its pursuit of Reynolds American. Hadleigh Beals, another former UBS banker, also worked on the team.
Nigel Meek – Deutsche Bank
Deutsche Bank also advised BAT, with its team led by Nigel Meek, chairman of UK investment banking. The Oxford graduate reportedly came close to pursuing a career as an RAF pilot, and retains an interest in flying despite choosing a City path. Matt Hall, James Ibbotson, Jimmy Bastock and James Stynes, chairman of M&A in New York, also worked on the deal.
A UBS team including John Woolland, James Robertson and David Roberts also advised BAT, while Cravath, Swaine & Moore and Herbert Smith Freehills worked on the legal side.
On the US side, Reynolds was advised by JP Morgan, Lazard and Goldman Sachs on the banking side, and Jones Day and Weil Gotshal & Manges on the legal side.