Analyst: BAT & RAI Negotiations Still Alive

NEW YORK — Three months since British American Tobacco (BAT) made an offer for Reynolds American Inc. (RAI), reports have called the potential deal into question. However, one industry analyst believes that the negotiations are still on track.

"We encourage investors to ignore the latest round of speculation in the press that negotiations have 'stalled' over concerns related to valuing RAI's heat-not-burn technology behind its core product, which recently completed the first phase of test marketing in Japan," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC.

"While we would expect some discussion of RAI's newly reintroduced heat-not-burn platform and possible synergies with BAT's existing heat-not-burn 'glo' platform, we have no reason to believe it would be a dealbreaker in and of itself," she explained.

According to Herzog, Wells Fargo Securities believes BAT's interest in RAI is driven by bigger potential positives, including: 

• Owning RAI outright would give BAT full ownership of the lucrative U.S. market, complementing its existing presence in high growth emerging markets; 
• Attractive synergies/cost savings; 
• Creates world's largest listed reduced-risk product (RRP) company with better aligned incentives and greater investments in RRPs; and 
• Geographic diversification/currency translation benefits, and access to RAI's stable stream of cash flow. 

In October, U.K.-based tobacco company BAT made an offer to acquire the approximately 58 percent of RAI common stock that BAT does not currently own for $47 billion, as CSNews Online previously reported.

According to BAT, the $47-billion offer values RAI at $56.50 per share, of which $24.13 would be in cash and $32.37 would be in BAT shares. It represents a premium of 20 percent over the closing price of RAI common stock on Oct. 20.

Winston-Salem, N.C.-based RAI followed by forming a transaction committee made up of independent directors to evaluate the bid in November. 

The two sides have been quiet since then, causing some reports to say that talks have stalled.

However, Herzog said that the industry should not expect a formal announcement on any potential revised offer from BAT. Under current regulatory laws, BAT is not required to publicly disclose a change to its offer price for RAI, provided BAT's underlying intention to acquire the remainder of RAI that it doesn't own hasn't changed, she explained, adding "we think there's a good chance RAI has already received a revised offer."

In addition, there is no formal timeline on the proposal. "BAT's offer is 'friendly' so there is no drop dead date or time requirements, although we believe it is in both companies' interest to conclude negotiations sooner rather than later," Herzog said.

The analyst also noted that a technology agreement between the two companies extends to vapor and electronic cigarettes and combustible products only. "Nothing to suspect here. Heat-not-burn wasn't envisioned as a core focus area when the technology sharing agreement was initially signed," she added.

Last week, Vivien Azer, director and senior research analyst at Cowen and Co., said that the deal still carried a high probability rate.

"While the delay in a consummated deal has extended longer than we thought, we still view the deal as likely — 85-percent probability," she said.