R. J. Reynolds and Brown & Williamson to combine US businesses
London, October 27 /PRNewswire/ -- - Agreements signed to combine
R. J. Reynolds with the US tobacco business of Brown &
Williamson ("B&W"), under a new public holding company,
Reynolds American Inc., which will apply to be listed on the New
York Stock Exchange - British American Tobacco and the current
shareholders of R. J. Reynolds will receive 42 per cent and 58 per
cent, respectively, of the common equity in Reynolds American -
Reynolds American will acquire Lane, British American Tobacco's US
smoking tobacco and cigar business, for US$400 million in cash -
Creates a combined business with an enlarged brand portfolio able
to compete more effectively in the challenging US operating
environment - Generates enhancement to earnings per share of R. J.
Reynolds and British American Tobacco, through expected annual
synergies of over US$500 million - Increases British American
Tobacco's cash flow in the first full year following completion,
taking into account a commitment from the management of Reynolds
American to recommend a dividend payout of 75 per cent of net
income - B&W to transfer to Reynolds American all Master
Settlement Agreement liabilities and the corresponding cash
balance, which averages US$750 million over the course of the year
- B&W to be indemnified for all existing and any future
litigation relating to its US business - Andrew Schindler,
currently Chairman and CEO of R. J. Reynolds, to become Chairman of
Reynolds American. Susan Ivey, currently CEO of B&W, to become
CEO of Reynolds American. British American Tobacco to appoint five
of the remaining 11 Directors of Reynolds American - British
American Tobacco has agreed not to increase its shareholding in
Reynolds American above 42 per cent for 10 years following
completion of the transaction and has agreed to normal restrictions
on the timing and quantum of any sale of Reynolds American shares -
Through this combination, British American Tobacco remains firmly
committed to the US market Commenting on the proposed transaction,
Andrew Schindler, Chairman and CEO of R. J. Reynolds, said: "This
agreement marks a milestone for both companies. The combination of
these companies will enable us to achieve tremendous efficiencies,
and will greatly enhance our ability to compete effectively in the
US market. The combination is expected to be accretive to earnings
and provide outstanding value and return to shareholders. R. J.
Reynolds and British American Tobacco recognise the mutual benefits
of this combination and share a strong desire to complete the
deal." Martin Broughton, Chairman of British American Tobacco,
said: "This exciting combination makes both strategic and financial
sense. This merger will improve our competitive position in the
most important cigarette market in the world. It gives the Group a
42 per cent share in a stronger and more sustainable business with
an enhanced brand portfolio. We believe that the merger is the best
way to achieve our long-term strategic ambitions in the US market,
while improving both our earnings per share and our cash flow in
the first full year following completion." There will be a joint
analyst, investor and media presentation in London at 9.30 am GMT
(4.30 am EST) on Tuesday 28 October 2003 at British American
Tobacco, Globe House, 4 Temple Place, London, WC2R 2PG with a
web-casting facility (listen only) on British American Tobacco's
website (http://www.bat.com/). There will also be a dial-in
conference call facility (listen only) for the 9.30 am GMT (4.30 am
EST) presentation; dial-in details are as follows: UK: 020 7081
9339 (password: BAT) US/International: +44 20 7081 9339 (password:
BAT) A playback facility for this presentation will be available
from 1.00 pm GMT onwards for 48 hours on Tel: +44 1296 618 704
(pass code: 720 106). A US dial-in conference call will take place
at 13.30 pm GMT (8.30 am EST); dial-in details are as follows: US:
800 362 0574 (password: BAT) UK/International: Dial in via the
International Operator, on the same number A playback facility for
this presentation will be available until 1 November 2003 on Tel:
800 934 7855. A recording of both presentations will be accessible
through http://www.bat.com/. An interview with Martin Broughton,
Chairman of British American Tobacco, is available in video, audio
and text on http://www.bat.com/ or http://www.cantos.com/. British
American Tobacco's quarterly results for the nine months to 30
September 2003 will also be presented at the joint analyst,
investor and media presentation. Overview R. J. Reynolds Tobacco
Holdings, Inc. ("R. J. Reynolds") and British American Tobacco
p.l.c. ("British American Tobacco" or, with its affiliates, the
"Group") announce that definitive terms have been agreed to combine
R. J. Reynolds with the US assets and liabilities of Brown &
Williamson Tobacco Corporation ("B&W's US Business" and
"B&W", respectively), British American Tobacco's 100 per cent
owned subsidiary (the "Combination"). Under the terms of the
Combination, R. J. Reynolds and B&W's US Business will be
combined under a new public holding company, Reynolds American Inc.
("Reynolds American"). R. J. Reynolds' existing shareholders will
receive 58 per cent of the common stock of Reynolds American, with
British American Tobacco receiving 42 per cent, valuing B&W's
US Business at approximately US$2.6 billion on the basis of R. J.
Reynolds' current market capitalisation of approximately US$3.6
billion. In addition, the Group will sell Lane, its US smoking
tobacco and cigars business, to Reynolds American, for US$400
million in cash (together with the Combination, the
"Transactions"). The Transactions are expected to be tax free to
the Group and to R. J. Reynolds' shareholders. Completion of the
Transactions is conditional upon receiving anti-trust clearance,
approval from R. J. Reynolds' shareholders and satisfactory
Internal Revenue Service rulings. Reasons for the Transactions The
combination of R. J. Reynolds and B&W's US Business will
consolidate the second and third largest US tobacco companies. It
will create a business with a combined market share in excess of 30
per cent in the US, the world's most profitable cigarette market.
The Boards of R. J. Reynolds and British American Tobacco believe
that the scale of this enlarged business and its combined
management strength create a platform from which to compete more
effectively in the challenging US operating environment. The
combined brand portfolio will include Camel, Doral, GPC, Kool,
Misty, Pall Mall, Salem and Winston. It is planned that Reynolds
American's headquarters and operations will be consolidated in
Winston-Salem, North Carolina. In 2002, the enlarged group would
have had combined sales of approximately US$10 billion and US
volumes of approximately 135 billion cigarettes. The combined
businesses are expected to generate annual cost synergies of over
US$500 million, which should be fully realised within 18-24 months
of closing, principally from sales, distribution, administration
and manufacturing. These savings are incremental to those recently
announced by R. J. Reynolds in its restructuring plan. Management
and Governance of the Enlarged Group Andrew Schindler, currently
Chairman and CEO of R. J. Reynolds, will become Executive Chairman
of Reynolds American for a six month period after closing and will
then serve as Non-Executive Chairman. Susan Ivey, currently
President and CEO of B&W, will become President and CEO. The
Board will comprise 13 Directors including the Chairman and the
CEO. Under the terms of the governance arrangements, the Group will
designate for nomination 5 of the remaining 11 directors and will
ensure that at least 3 of its nominated Directors are independent.
Structure of the Combination The Combination will be effected
through the creation of a new holding company, Reynolds American,
which will apply to be listed on the New York Stock Exchange.
B&W's US Business will be combined with R. J. Reynolds Tobacco,
a subsidiary of R. J. Reynolds. Through B&W, the Group will
receive Reynolds American shares representing 42 per cent of
Reynolds American's fully diluted share capital at the time of
closing, as consideration for B&W's US Business. R. J.
Reynolds' existing shareholders and optionholders will receive
shares and options in Reynolds American representing 58 per cent of
Reynolds American's fully diluted share capital at the time of
closing. In addition, the Group will receive US$400 million in cash
in consideration for the sale of Lane, which will be used to reduce
net indebtedness and for general corporate purposes. Lane will be a
separate subsidiary of Reynolds American, as will Santa Fe Natural
Tobacco Company, Inc. British American Tobacco will enter into a
standstill agreement with Reynolds American, which will prevent the
Group from increasing its shareholding in Reynolds American above
42 per cent for 10 years following completion of the Combination
and the Group will be restricted in its ability to sell shares,
reflecting the long-term nature of its investment. R. J. Reynolds
Tobacco will indemnify B&W for all existing and any future
litigation relating to the US tobacco business. Reynolds American's
rights to the Group's international brands will be restricted to
the US market but Reynolds American will enter into a five year
contract manufacturing arrangement for the supply of the Group's
international brands to Japan and various other markets. Financial
Effects of the Combination B&W has recently faced increased
competition and the outlook for the next two to three years
continues to be uncertain and challenging. The Transactions are
expected to be at least 4 per cent enhancing to British American
Tobacco's earnings per share in the first full year following
completion, with increased positive contributions thereafter. The
management of R. J. Reynolds is currently committed to a dividend
of USUS$3.80 per share. The designated management of Reynolds
American has committed to recommend to the Board of Reynolds
American a dividend of 75 per cent of its net income. Consequently,
British American Tobacco expects that by 2005 the dividends
received from Reynolds American will exceed the net cash flow that
B&W's US Business would have contributed to the Group as a
stand-alone business. The Group's 42 per cent shareholding is
likely to preclude substantial share repurchase programmes by
Reynolds American. British American Tobacco's consolidated cash
balances have historically included cash that is held to meet
payments under the Master Settlement Agreement ("MSA"). At closing,
B&W will be transferring all MSA liabilities and the
corresponding cash balance associated with them to Reynolds
American. The cash balance fluctuates during the year, but averages
approximately US$750 million. The Group will receive US$400 million
cash consideration for the sale of Lane. British American Tobacco
will equity account for its investment in Reynolds American as an
associate. Timetable The Transactions are conditional upon
obtaining anti-trust clearance, the appropriate rulings from the
Internal Revenue Service and the approval of R. J. Reynolds'
shareholders. R. J. Reynolds and B&W have agreed appropriate
contractual commitments to complete the Transactions and it is
expected that this should be achieved by mid-2004. The Transactions
are inter-conditional and will complete simultaneously. Notes -
British American Tobacco is the world's most international tobacco
group and the second largest stock market-listed tobacco group by
global market share. It currently has some 85 factories in 66
countries and in 2002 sold 777 billion cigarettes. Including
associated companies, the Group employs more than 85,000 people
world-wide. Its headquarters are in London. - The Group has a
global market share of almost 15 per cent and more than 300 brands
including international brands such as Lucky Strike, Kent, Dunhill
and Pall Mall. - B&W is the third largest cigarette
manufacturer and marketer in the US. It is a 100 per cent
subsidiary of British American Tobacco. As at 31 December 2002,
B&W's US Business had net assets, on the basis of UK GAAP, of
US$631 million. In the twelve months to 31 December 2002, B&W's
US Business generated profits before interest and taxation, on the
basis of UK GAAP, of US$598 million (US$325 million in the nine
months to 30 September 2003, before non-recurring items). - Lane
manufactures several smoking tobacco, cigar, and pipe tobacco
brands. It is a 100 per cent subsidiary of British American
Tobacco. As at 31 December 2002, Lane had net assets, on the basis
of UK GAAP, of US$45 million. In the twelve months to 31 December
2002, Lane generated profits before interest and taxation, on the
basis of UK GAAP, of US$39 million (US$27 million in the nine
months to 30 September 2003). - R. J. Reynolds is the parent
company of R. J. Reynolds Tobacco Company and Santa Fe Natural
Tobacco Company, Inc. R. J. Reynolds Tobacco Company, which is the
second-largest tobacco company in the United States, has a product
line which includes Camel, Doral, Salem and Winston. Santa Fe
Natural Tobacco Company, Inc. manufactures Natural American Spirit
cigarettes and other tobacco products, and markets them both in the
US and internationally. As at 31 December 2002, R. J. Reynolds had
net assets, on the basis of US GAAP, of US$6,716 million. In the
twelve months to 31 December 2002, R. J. Reynolds generated profits
before taxation, on the basis of US GAAP, of US$683 million, after
deducting US$224 million of restructuring and asset impairment
charges. This press release, which has been prepared by and is the
sole responsibility of British American Tobacco, has been issued by
British American Tobacco and has been approved by Goldman Sachs
International, Lazard and Cazenove & Co. solely for the
purposes of section 21 (2)(b) of the Financial Services and Markets
Act 2000. Goldman Sachs International, Lazard and Cazenove &
Co. which are regulated in the UK by the Financial Services
Authority, are acting exclusively for British American Tobacco in
connection with the Transactions and will not be responsible to
anyone other than British American Tobacco for providing the
protections afforded to customers of Goldman Sachs International,
Lazard and Cazenove & Co. nor for providing advice in relation
to the Transactions. Some of the statements herein are
forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995, including any statements about
satisfying the closing conditions to the proposed transaction. Such
forward-looking statements are inherently subject to known and
unknown risks, uncertainties and other facts that may cause actual
results, performance or achievements of British American Tobacco
and its affiliates to be materially different from those expected
or anticipated in the forward-looking statements. Any such
forward-looking statements are based upon British American
Tobacco's current expectations and assumptions, which may be
affected by a number of factors, including those discussed above.
The following factors are among those that may cause actual results
to materially differ from those expected: the approval of the
proposed transactions by R. J. Reynolds' shareholders; receipt and
timing of various regulatory approvals; the satisfaction of closing
conditions; the timing of the closing of the proposed transactions;
the volume of products sold by British American Tobacco and the
price at which such products are sold; and government regulations
limiting its ability to sell its products. British American Tobacco
has no responsibility to (and disclaims an intention to) update the
forward-looking statements contained herein to reflect events or
circumstances occurring after the date hereof. Reynolds American,
the holding company to be formed in the proposed transaction,
intends to file a registration statement on Form S-4 that will
include a joint proxy statement/prospectus and other relevant
documents in connection with the proposed transaction. INVESTORS
AND SECURITY HOLDERS ARE ADVISED TO READ THESE DOCUMENTS WHEN THEY
BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION
ABOUT THE PROPOSED TRANSACTION. Investors and security holders may
obtain a free copy of the prospectus/proxy statement (when it
becomes available) and other documents filed by R. J. Reynolds and
Reynolds American with the SEC at the SEC's website at
http://www.sec.gov/. Free copies of the prospectus/proxy statement
(when it becomes available), as well as the other documents filed
with the SEC by R. J. Reynolds and Reynolds American, may also be
obtained from R. J. Reynolds by directing a request to R. J.
Reynolds at P.O. Box 2866 Winston-Salem, NC 27102-2866, USA or on
R. J. Reynolds' website, http://www.rjrholdings.com/. DATASOURCE:
British American Tobacco Enquiries: British American Tobacco, Ralph
Edmondson, Head of Investor Relations, +44 20 7845 1180 David
Betteridge, Press Relations Manager +44 20 7845 2888 Goldman, Sachs
& Co. James Del Favero +1 212 902 1000, Joseph Gatto +1 212 902
1000 Goldman Sachs International, Karen Cook +44 20 7774 1000 Nick
Reid +44 20 7774 1000 Lazard, Nicholas Jones +44 20 7187 2000 Sarah
Hedger +44 20 7187 2000 Cazenove & Co. David Mayhew +44 20 7588
2828 Christopher Smith +44 20 7588 2828 Credit Suisse First Boston
(Europe Ltd) Charles Kirwan-Taylor +44 20 7888 8888 Richard Crawley
+44 20 7888 8888
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