British American Tobacco PLC just made a bid to take over approximately 58 percent of its American peer Reynolds American Inc. That is to say, that BAT wants to spend $47 billion to takeover more of the corporation that it does not already own, and if they do, the new partnership will create the largest listed tobacco company (by revenue and market value) in the world.
While there are certain implications that go along with this, the biggest signal this sends is that all other global competitors will also have to likely partner up if they are going to want to compete.
Indeed, the number of publicly traded tobacco companies continues to decrease. As such, only a few possible combinations of partners can possibly remain. For example, Japan Tobacco Inc would probably buy into Imperial Brands Plc (of Britain) and Philip Morris International Inc has would probably merge, again, with Altria Group Inc. It has been eight years since their original split. Experts say that any other future deals would probably be far more complicated than past deals.
“This may pave the way for further consolidation,” explains Jeffries analyst Owen Bennett, an analyst at Jefferies. “Given the attractiveness of the U.S. market, we believe Japan Tobacco would want greater exposure and Philip Morris International also.”
BAT’s full—and more importantly, unsolicited—bid to take full ownership of Reynolds also proves that the once reluctance to own US tobacco businesses due to various legal liabilities is likely no more.
Whitman Howard analyst Chris Wickham explains that this—along with the desire to increase availability of reduced-risk tobacco products—has put the industry in a state of flux.
Philip Morris originally bifurcated in 2008. The goal was to liberate its faster-growign overseas operations while its US business arm—which they rebranded as Altria—struggled to recover from all of the smoker lawsuits. The Reynolds/BAT merger move would, of course, threaten Philip Morris International’s top spot.
As such, Wells Fargo analyst Bonnie Herzog comments, “We don’t believe Philip Morris would idly sit by.” And with that, Philip Morris shares (in its US arm, Altria) jumped up more than 3 percent in New York, on Friday. That is the most significant intraday gain for the company in more than a year.