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WINSTON-SALEM, N.C. — Reynolds American Inc. is selling the international rights to the Natural American Spirit brand name and associated trademarks to the Japan Tobacco Group of companies (JT Group). The all-cash transaction carries a value of approximately $5 billion.
The deal also includes the international companies that distribute and market the brand outside the United States.
The purchase does not include the rights to the Natural American Spirit brand name and associated trademarks in the U.S. market, U.S. duty-free locations, U.S. territories or in U.S. military outlets, all of which will be retained by Santa Fe Natural Tobacco Co. Inc.
Santa Fe is a wholly owned subsidiary of Winston-Salem-based RAI.
According to RAI, the international companies being sold employ about 280 people, primarily in Europe and Japan. Those companies distribute and market Natural American Spirit additive-free and organic styles of cigarettes and roll-your-own tobacco primarily in European and Asian markets.
The brand's largest markets are Japan, Germany and Switzerland. Natural American Spirit sells at a premium price in each of the markets in which it competes, just as it does in the U.S. market, the company added.
"Natural American Spirit has achieved excellent international growth over the past several years," said Susan M. Cameron, RAI's president and CEO. "When backed by the strength of the JT Group's international distribution, sales force and manufacturing capabilities, we believe that growth trajectory will not only continue, but accelerate."
Selling the international trademark rights to a company with an established global infrastructure was more advantageous to RAI than investing in an international infrastructure capable of supporting Natural American Spirit's growth potential, Cameron said.
"We believe this sale once again demonstrates our commitment to creating value for our shareholders, and we believe the addition of Natural American Spirit to the JT Group's brand portfolio will benefit their investors as well," she said.
Cameron noted that once the transaction is complete, the international rights to all of RAI's operating companies' cigarette trademarks will be owned by international tobacco companies, allowing the RAI companies to focus on brand growth in the U.S. market.
"Natural American Spirit, which has a strong and international presence in a premium priced category, will allow the JT Group to further extend its brand portfolio. This strong and unique brand equity combined with an energetic and experienced team of people will further strengthen our Group's business foundation," said Mitsuomi Koizumi, president and CEO of the JT Group.
Notably in Japan, which now accounts for the majority of the sales volume worldwide excluding the U.S., the brand has experienced significant growth. This investment will underpin the group's sustainable long-term profit growth in this highly competitive market, according to JT Group.
The transactions must be approved by regulatory authorities in a number of countries. The companies are working to attain regulatory approvals by early 2016, and the transaction will close thereafter.
All current international employees will become employees of the JT Group of companies following the closing of the transaction.
J.P. Morgan Securities LLC and Lazard acted as financial advisors, and Jones Day acted as legal advisor to RAI on this transaction.
According to Bonnie Herzog, managing director of beverage, tobacco and convenience store at Wells Fargo Securities LLC, the purchase agreement also contains a non-compete clause which restricts RAI and JT from producing, selling, distributing and developing natural, organic and additive-free combustible tobacco cigarettes and roll-your-own tobacco products in each other's territories of business, for a period of up to five years from the close of the transaction.
"As we expected, this sale was a very smart and strategic move by RAI to monetize a very valuable asset while retaining its crown jewel, in our view — the Natural American Spirit business in the U.S.," she said. "RAI's position in the overall tobacco industry is stronger than ever, and it has one of the best brand portfolios in the industry."
Cowen & Co. was surprised by the deal's valuation, according to Vivien Azer, director and senior research analyst at Cowen and Co. However, "the addition of a super-premium product to JT's portfolio should be exceedingly beneficial, in particular in their home market of Japan."
She added JT holds a roughly 60-percent market share in Japan, largely comprising mainstream priced Mevius (roughly 3-percent share), which is priced at a discount to Marlboro. The addition of Natural American Spirit should position JT well to compete more effectively at the high-end of the market, Azer explained.
Outside of Japan, JT's leading brands of Winston and Camel account for nearly 50 percent of Japan Tobacco International's volumes, and are largely premium/mainstream priced offerings.
"While JT is the smallest of the big four in Europe, the addition of Natural American Spirit should present opportunity to bolster their competitive positioning in markets where Natural American Spirit already operates, while also offering the benefit of new market opportunities, like Russia, where over time JT expects trade-up to resume as the macro backdrop improves," she noted.
As for RAI, Azer said "we are encouraged that this cash infusion will provide RAI with even greater flexibility to pay down debt and drive incremental returns for shareholders."