R.J. Reynolds is set to buy BAT's U.S. cigarette and tobacco businesses for more than $3 billion in cash and stock, creating a stronger rival to Altria Group Inc.'s (MO) Philip Morris USA, which holds close to 50 percent of the U.S. cigarette market.
R.J. Reynolds shares jumped more than 6 percent to $70.50 in New York Stock Exchange (search) trading, their highest in two years. Before the deal was announced last October, Winston- Salem, North Carolina-based RJR's shares traded at $43.25.
The shares of London-based British American Tobacco surged to a record high Wednesday. The deal, expected to close by the end of July, should protect the U.K. company from costly lawsuits brought by sick smokers.
"It was a masterstroke when they sorted out how to ringfence their U.S. legal problems and the share price reaction today shows just how much it is worth," said Hilary Cook, director of investment strategy at Barclays Private Clients.
BAT shares were last up 7.2 percent at 883 pence. BAT's American Depositary Shares, which trade on the American Stock Exchange, were up $1.23, or 4.0 percent, at $32.
BAT is the world's second-largest cigarette maker behind Altria's Philip Morris units. R.J. Reynolds is No. 2 in the U.S. market to Altria's Philip Morris USA.
The Federal Trade Commission (search) late Tuesday said its commissioners had voted 4-0 to close the agency's investigation of the deal without taking any action. One commissioner was recused. The Internal Revenue Service (search) Tuesday confirmed the proposed merger will be tax-free.
R.J. Reynolds filed an amended registration statement with the U.S. Securities and Exchange Commission Wednesday with its proxy materials. The SEC must now clear the proxy for RJR shareholders and the shareholders must still approve the deal.
The transaction would bring brands such as RJR's Camel and BAT's Kool under one roof. RJR would also acquire Lane Limited, which makes cigar, roll-your-own and pipe tobacco brands and distributes Dunhill tobacco products. BAT would hold a 42 percent stake in the new company, Reynolds American Inc.
The deal's unanimous approval, with no divestitures, was "the most likely and best outcome we were predicting," Smith Barney analyst Bonnie Herzog said in a note.
She kept her "buy" rating on RJR and raised her target price to $77 from $70.
The deal is seen as a key way for R.J. Reynolds to remain competitive in the U.S. market, where it has lost market share to Philip Morris and to smaller competitors who are not bogged down by hefty payments major cigarette makers must pay under a 1998 settlement with U.S. states.
Prudential analyst Rob Campagnino raised his price target on RJR to $64 per share from $53, but kept his "underweight" rating.
"We certainly see the business combination as accretive, and substantially so, but we would need to make heroic assumptions to get to some of the earnings estimates that we have seen bandied about by the sell-side and investors," he wrote in a note.
There will be 13 members of the new company's board, RJR said. Two will be Andrew Schindler, chairman and chief executive of RJR, who will become executive chairman of Reynolds American; and Susan Ivey, president and CEO of Brown & Williamson, who will become president and CEO of Reynolds American. The board will include six directors from the existing RJR board and five directors designated by BAT.