‘BAT offer about scale’

British American Tobacco’s (BAT) offer for Reynolds American Inc. (RAI) is about scale, according to Berenberg Bank.

“RAI and BAT have a technology agreement and cooperate on many issues so this is largely about taking control of a significant share of the world’s largest profit pool,” Berenberg wrote in a review of deal. RAI has 33 percent share of U.S. market.

Following RAI’s acquisition of Lorillard, the U.S. market has become far more stable in terms of pricing, according to the bank. What’s more, BAT’s major international rival, Philip Morris International, is not present in the U.S. market.

Berenberg says the $400 million of potential synergies notes by BAT are unverified but will partly consist of lower head-office costs in the U.S.

The bank also notes that BAT is effectively shifting the profits split of the group away from the emerging markets towards the developed world with the U.S. alone on a pro-forma basis being 40 percent of the net profits of the combined group.

Berenberg estimates that on pro-forma 2017 the enlarged BAT would generate some 62 percent of net profits from developed markets and some 38 percent from emerging markets.

BAT has made a proposal to acquire the 57.8 percent of Reynolds American that it does not already own.

The offer would value Reynolds American at $56.5 per share, which is broadly a 20 percent premium against the closing price.

The deal would have to be approved by Reynolds American’s seven independent directors and the timetable for completion seems to be the middle of next year, if approved.