Reynolds American

A shareholder vote expected locally for almost 13 years arrives this morning.

At 9 a.m., Reynolds American Inc. shareholders will determine whether to accept $54.5 billion from British American Tobacco PLC in exchange for selling the 57.8 percent of Reynolds shares that BAT doesn’t already own.

Simultaneously, BAT shareholders will vote on whether to approve the purchase and the issuance of up to 435.56 million new shares, which will comprise 17.7 percent of the company’s 2.46 billion outstanding shares.

If both shareholder groups approve the deal, Reynolds is projected to become a U.S. subsidiary of BAT on July 25. Additional merger details are expected to be disclosed July 25 as part of the deal closing.

There is a $1 billion breakup fee for both companies.

The shareholder votes come nine days shy of 13 years from when 98.8 percent of R.J. Reynolds Tobacco Holdings Inc. shareholders approved the company’s $4.4 billion stock purchase of Brown & Williamson Tobacco Corp. — BAT’s U.S. subsidiary at that time.

Reynolds American Inc. was formed from that merger, debuting July 30, 2004. BAT gained 42.2 percent ownership of Reynolds, giving it an internal insight into a competitor seldom seen in corporate America.

Overall, legacy Reynolds shareholders would own 19 percent of BAT and three current Reynolds board members would join the BAT board of directors.

Reynolds is estimated to have between 2,000 and 2,200 local employees, the majority of whom work at its Tobaccoville plant.

BAT said in a Jan. 18 regulatory filing that it “has no plans to close or move the (Reynolds) head office in Winston-Salem, nor make any significant changes to the current high-quality manufacturing facilities in North Carolina and Tennessee (American Snuff Co.), nor to the trade marketing team.”

BAT Chief Executive Nicandro Durante has said BAT projects $400 million in cost savings by July 2020. That includes eliminating duplicate corporate functions, greater supply chain economies of scale and enhanced manufacturing efficiency from Reynolds’ 2-million-square-foot Tobaccoville plant.

Debra Crew would remain as Reynolds’ chief executive. Crew took over that role Jan. 1, with Susan Cameron sliding into what became in April a non-executive chairwoman role. That role ends for Cameron when the deal is closed.

“Over the long term, we expect Newport & Natural American Spirit (in the U.S.) to buoy Reynolds’ cigarette volume performance, and also see an opportunity for BAT to take Reynolds’ Vuse (electronic cigarette) platform to international markets,” Wells Fargo Securities analyst Bonnie Herzog said Monday.

A 10-year moratorium agreed to by Reynolds and BAT prevented BAT from adding to its stake until July 30, 2014.

There was analyst speculation from the moment the moratorium was announced that BAT would buy at least a majority stake in Reynolds soon after it expired.

Between the expiration of the moratorium and BAT’s offer being accepted in January by Reynolds’ independent directors, Reynolds spent $29.25 billion on buying Greensboro rival Lorillard Inc. in June 2015, essentially to acquire Newport, the top-selling U.S. menthol cigarette and the No. 2 overall cigarette.

Analysts saw that as an easier regulatory path for BAT to acquire Newport for global distribution than taking over Reynolds first and then attempting to buy Lorillard.

The shareholder votes also come just five months shy of 30 years from when Kohlberg Kravis Roberts & Co. emerged in December 1988 with the winning $26.4 billion bid for RJR Nabisco Inc. The leveraged buyout bid drew the unanimous support of RJR Nabisco’s board of directors.

At that time, it was the largest purchase in corporate America history, nearly doubling Chevron Corp.’s $13.4 billion purchase of Gulf Oil Corp. In today’s dollars, the KKR purchase is worth $52.5 billion.

KKR defeated a Reynolds management-led bid spurred by its controversial Chief Executive Ross Johnson. The deal was completed in April 1999 with 85 percent of shares voted in favor of the KKR offer.

As a result of KKR’s successful bid, Reynolds was saddled with $22.3 billion in debt. There was immediate analyst speculation that KKR had taken on too much with Reynolds.

It took Reynolds more than 10 years, several workforce reductions, the June 1999 divestiture of the Nabisco side of the company, and the sale of its international cigarette brand rights to Japan Tobacco for $5 billion, to lower the debt to manageable levels of about $1 billion.

BAT plans to pay for the purchase through $24.4 billion in cash and $30.1 billion in the new BAT shares.

BAT said a combined BAT-Reynolds would have had $30.35 billion in revenue in 2016, representing $18.8 billion from BAT and $11.75 billion from Reynolds. Net profit would have been a combined $27.98 billion.

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