Does BAT offer show UK on the prowl? Not so fast, say bankers

A packet of Dunhill cigarettes made by British American Tobacco is photographed in London, 28 February 2006

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BAT on October 21 offered $ 47 billion for the roughly 58% of Reynolds American that it doesn’t already own, and said it is offering cash and BAT stock worth $ 56.50 a share for the remaining stake.

The deal comes amid a tepid post-referendum period for deals involving UK companies, with deal value of $ 96.1 billion between the referendum and October 21, according to Dealogic. That’s down by more than 60% on the $ 268.3 billion worth of deals in the corresponding period a year earlier. The data does not include BAT’s offer, which is dependent on the approval of the Reynolds board.

• Relationship bankers reign as BAT chases $ 47bn Reynolds deal

BAT’s offer is notable for the fact a UK company is making an offer in dollars despite sterling’s 18% slump against the dollar since the referendum. But bankers poured cold water on the potential deal heralding a comeback for UK-initiated M&A right now. BAT’s move, they say, is one only leading companies can pull off.

Guy Ellison, head of UK equities at Investec Wealth & Investment, said the offer goes “against the expected trend”, but added that this is a “BAT specific case”.

Ellison said: “Reynold’s share price has been a bit lacklustre, giving BAT an opportunity.”

David Lomer, co-head of M&A in Europe, the Middle East and Africa at JP Morgan, said strong share prices, historically cheap access to debt capital, higher foreign earnings and significant synergy potential are some of the factors that are outweighing weaker FX in this environment.

Analysts at Citigroup said in a note Friday it sees the US as the most attractive major tobacco market, and said it sees Reynolds as placed to generate the best sales and earnings growth of any major American tobacco company

One of London’s most senior dealmakers, who declined to be named, also cautioned against drawing too many conclusions from the currency move: “In my experience currencies have never driven merger activity,” he said.

One factor in BAT’s favour, however, has been how the two cigarette giants’ share prices have moved since the Brexit vote. BAT’s shares have risen around 13%, while Reynolds’s have fallen roughly 7.5%. That, coupled with low interest rates influenced BAT’s decision, The Wall Street Journal reported.

Despite the slowdown in UK M&A activity, there have been a number of big ticket deals since the referendum, for the right companies.

Inbound activity has benefited from the weakness in sterling. US group AMC Entertainment cited the pound as a driver behind its bid for Odeon & UCI Cinemas Group in July. However, UK companies defying the currency moves to look for deals abroad, including Micro Focus International’s September agreement to buy Hewlett-Packard’s software business in a deal worth $ 8.8 billion, point to the fundamentals of the M&A market remaining.

JP Morgan’s Lomer said: “Global industries haven’t stood still for Brexit and in the UK we’re fortunate to have many global leaders.”

Scott Bok, the CEO of Greenhill & Co, said: “I don’t think this deal signals anything in particular about the UK economy or about life after Brexit, other than the simple fact that for large global companies life must go on. They will continue to pursue their strategic goals around the world, without excess regard to either politics or exchange rates.”

• This article also appeared on WSJ City, a made-for-mobile app that combines the best of the Wall Street Journal and Financial News, tailored for an audience in the City of London. Download here

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