Economy First Look

Tobacco companies announce $49-billion merger – will others follow?

British American Tobacco is set to take over Reynolds American, Inc., creating the world's biggest listed tobacco company.

Cigarettes are seen during the manufacturing process in the British American Tobacco Cigarette Factory (BAT) in Bayreuth, southern Germany in 2014.
Michaela Rehle/Reuters/File
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A British tobacco company is swallowing its US rival in a $49-billion deal slated to make it the world’s largest listed tobacco company. 

British American Tobacco (BAT) announced on Tuesday that it will purchase Reynolds American, Inc., placing brands such as Newport, Lucky Strike, Camel, and Pall Mall, as well as newer products like e-cigarettes, under its umbrella. The company’s executives view the move as an investment in the American tobacco market, which is the second most profitable in the world, following China’s.

"It will create a stronger, global tobacco and NGP [next generation products] business with direct access for our products across the most attractive markets in the world," BAT Chief Executive Nicandro Durante said of the merger on Tuesday. "This is the right moment to make the deal; the multiples of BAT and Reynolds are closer than ever before."

As more people in Western nations leave behind traditional cigarettes for products like e-cigarettes, which manufacturers have marketed as safer alternatives to combustible ones, similar deals could likely follow, analysts say. The sale has put BAT at an advantage with those seeking newer products in the growing US market as well as those in developing countries, who more often choose less expensive traditional cigarettes and see fewer anti-smoking campaigns.

Prior to the sale, BAT already owned more than 40 percent of Reynolds. By making a further investment, the company can now exercise full leadership and control of Reynold’s products, their direction, and profits.

Some say that company’s increased size and influence could lead others to bolster their own efforts and merge together, allowing them to serve both the traditional and e-cigarette markets that vary in size around the world.

"The sheer scale of the enlarged BAT raises the pressure on the remaining players to bulk up too, and attention is likely to turn to Britain's Imperial Brands, who look more and more like a minnow swimming in a tank of big, hungry fish," Steve Clayton, a fund manager for financial services firm Hargreaves Lansdown in the UK, told Reuters.

Forays into new products are becoming vital survival strategies for tobacco companies in the 21st century, as smoking has continued to pick up stigma. Last fall, Philip Morris International, then the largest worldwide tobacco company, said it may someday phase out traditional cigarettes in favor of the reduced-risk products.  

But high profitability in developing countries is likely to keep cigarettes on the shelves far into the future, experts say. And doubts surrounding e-cigarette manufacturers’ safety claims have launched efforts to reduce their availability to minors, trimming the target market for such products.

“The future is very bright for traditional cigarettes,” Heather Wipfli, the associate director for the University of Southern California Institute for Global Health, told The Christian Science Monitor in late November. “I think there is no expectation that traditional cigarettes are going away anytime in our lifetime, or anytime in the foreseeable future.”

This report contains material from Reuters and the Associated Press.

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