After market close, RJR announced that it will merge with Brown & Williamson Tobacco Corp., the US arm of British American Tobacco p.l.c. Under this definitive agreement:
- NewCo will have around 150m outstanding shares. RJR shareholder will own 58% of the company and BAT will own 42% of the company.
- NewCo will have a combined revenue of $10b and over 30% of the US cigarette market (2002 number)
- RJR intends to maintain its $3.80 annual dividend.
- Deals to be closed in mid-year 2004.
In s separate interview of BAT Chairman Martin Broughton, Martin mentioned that the NewCo will save another $500m on top of the $800m due to RJR major reconstruction announced earlier. He also mentioned Susan Ivey will replace Andy Schindler to be the CEO after the transition period; Andy will be CEO during the transition and Chairman of the combined operation since day one.
Initial news says RJR is up more than 8% on the news.
Personally I believe this is good news for RJR. The synergy between the No. 2 and No. 3 in the market is tangible. Barring any regulatory approval issues, this deal should unlock substantial value for shareholders.
I'm raising my RJR price target to $50. I'll conduct an in-depth quantitative analysis afterwards.
Before this announcement, S&P set RJR target price at $65.30 on September 24, 2003. Smith Barney set the target at $43 (September 17, 2003). Lehman Brother target is $43.00 (September 17, 2003).