There was some big news in the business world this week, when Winston-Salem-based Reynolds American announced that it reached a merger agreement with British American Tobacco. BAT will use the more than $49 billion deal to acquire the remaining 58 percent share of the company.
It's one of a series of large mergers that have taken place in North Carolina over the past year.
WFDD's Keri Brown sat down with Katie Arcieri of the Triad Business Journal. She's been following the story. Arcieri says the changes will have a significant impact on the future of Reynolds American.
How significant is this deal for the company? Reynolds American?
This deal is really going to create a stronger, more global tobacco company. It's expected to yield long-term sustainable growth for the company. Smoking is on the decline, and so these companies and tobacco companies all over are consolidating and trying to increase their shareholder value, so they can compete against each other. It's going to basically surpass Philip Morris International as the largest publicly traded tobacco company. That's very significant. Now, we don't know exactly how they will end up competing, but with new products like the VUSE e-cigarette and Newport that Reynolds has already acquired, they're probably going to be a very formidable competitor in the future.
British American Tobacco originally proposed to pay $47 billion for Reynolds, but the company rejected that offer in late 2016, saying the price was too low. Why did Reynolds accept the offer this time around for more than $49 billion?
Susan Cameron, who is the former CEO of Reynolds and current executive chairwoman, said $49.4 billion was a real “sweet spot price.” It's an extra $2 billion dollars for that deal, but it offered a better return for shareholders than the previous offer in the fall. It also includes an extra $5 billion dollars in cash. And, as a result of this deal, Reynolds is going to be about 40 percent of BAT's total operating profits, so shareholders are going to benefit from that.
The deal is expected to save the combined firm millions over the next few years. Where will those savings come from and how will those cost-reductions affect local operations?
Susan Cameron told me this week that a great majority of the jobs are going to stay intact in the U.S., so basically the way that the business is run in the U.S. isn't going to change materially. That's really good news for Reynolds' Tobaccoville plant and along with the company's Winston-Salem facilities. At the end of the day, U.S. operations for this combined company are going to remain in Winston-Salem. But she didn't know exactly at the end of the day whether or not the name would change. Cameron did say that Reynolds has been in Winston-Salem since 1875 and that other BAT subsidiaries have not gone through a name change, so maybe BAT will keep the Reynolds nameplate intact and leverage it.
What does this deal mean for Reynolds as a public company?
Reynolds will cease to exist as a public company once this transaction is completed, much like we saw in 2015 when Lorillard ceased to exist once Reynolds bought that company. There's not going to be a need to have a public board of directors for Reynolds, there's not going to be a need for separate SEC filings apart from BAT, so there's going to be some cost savings that come as a part of that, but workers who were dedicated to preparing public filings and things like that will have to be redeployed to do something else.
A lot of times these deals are good for CEO's and shareholders, but they can be bad for consumers and sometimes communities. What are we really looking at here?
This is actually the second multi-billion dollar transaction that Reynolds will have completed within the past two years. Just a year ago, we really saw the effect of the Lorillard/Reynolds deal with Lorillard shedding hundreds of jobs in Greensboro. Meanwhile, you saw a lot of activity and a lot of jobs come to Winston-Salem, so it really is a mixed bag for communities.
We've heard about more than just tobacco mergers lately.
We are seeing a lot more mergers in the Triad, in the U.S. for instance, just in 2016 you've seen about four local companies announce mergers. You saw Apollo Global completing its acquisition of the Fresh Market in Greensboro. You saw Krispy Kreme Doughnuts being acquired by JAB Beech in July, and now you're seeing Reynolds moving forward on the $49.4 billion deal.
Do we expect this trend of mergers and acquisitions activity to continue in the Triad this year?
I've talked with a number of analysts who do believe that deal-making conditions are going to be positive in 2017. The economy has improved a lot over the last few years and companies have more cash to spend on buying companies. One analyst told me that private equity companies are prime for deals largely because they've raised a lot of money that hasn't been put to work yet. He also did mention that a lot of companies held off on mergers in 2016 due to the election and various geopolitical factors. So, I think you are going to see a lot more of these types [of] deals in the future where international companies are saying we want to get a toehold in the U.S. and this is exactly indicative of that.
The deal is subject to regulatory and shareholder approval from both companies.
*Follow WFDD's Keri Brown on Twitter @kerib_news
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