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    Japan Tobacco Reportedly Pursuing RAI Cigarette Assets

    Talks said to involve Natural American Spirit for $5B.

    WINSTON-SALEM, N.C. — Reynolds American Inc. (RAI) could be shedding more cigarette assets, just months after selling some brands to ITG Brands LLC as part of its acquisition of Lorillard Inc.

    After the close of business on Thursday, Bloomberg reported that Japan Tobacco was in advanced talks with RAI to buy Natural American Spirit (NAS) assets from its Santa Fe Natural Tobacco Co. subsidiary for a reported $5 billion.

    An RAI spokesman declined to comment on the speculation.

    "While we aren't sure whether RAI is indeed seriously considering selling some or all of Santa Fe assets at this point or which assets are potentially being considered, regardless we believe this is a win-win scenario for RAI shareholders," said Bonnie Herzog, managing director of beverage, tobacco and convenience store at Wells Fargo Securities LLC.

    "We believe if the speculation proves true, any transaction would monetize an asset that we have long believed to be underappreciated and undervalued by the market. Alternatively, if RAI retains Santa Fe, we believe the market will give proper credit for the true value of the NAS brand especially as the brand continues to grow," she added.

    Regardless of the outcome, Herzog said reports of an interested buyer at the table shows RAI continues to have optionality. 

    According to Herzog, Santa Fe could be worth nearly $7.6 billion as a standalone business. RAI has flexibility to unlock this value given that Santa Fe is a 100-percent owned subsidiary of RAI with a separate headquarters and salesforce, in which it has been making incremental investments, and manufacturing facility in Oxford, N.C., she added.

    Vivien Azer, director and senior research analyst at Cowen and Co., questioned why RAI would sell NAS now when the possibility was not on the table during the Lorillard acquisition process.

    "During the near year-long wait while the [Federal Trade Commission] reviewed RAI's acquisition of Lorillard, there was debate over whether RAI would be willing to sell Natural American Spirit to satisfy anti-trust concerns," Azer said. "RAI was clear at the time they would not sell the fast-growing NAS brand. If they weren't willing to sell to get the attractive Newport brand, we think it is highly unlikely they would sell today."

    Any potential deal could be tied to a recent warning letter from the Food and Drug Administration to Santa Fe over its description that NAS cigarettes are "Natural" and "Additive-free" on its product labeling, as CSNews Online previously reported.

    "If the motivation were the FDA finding, that would in fact be a reason for [Japan Tobacco] to actively avoid such a deal," Azer said.

    She added that at its recent investor's meeting in London, Japan Tobacco said it was "highly unlikely at this moment we will make an entry into the U.S. cigarette business."

    The tobacco company added that the environment is "quite tough within the United States" and "in order to execute business within that kind of environment, you need to have prepared the head count — the manpower in preparation — in anticipation of such litigation," Azer reported.

    "It is far more conceivable that RAI would sell the international rights to the NAS brand, given that they already sold international rights to Camel, Winston and Salem cigarette brands to in 1999," she explained.

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