Battered by cost pressures and dwindling market shares, cigarette giants R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Corp. on Monday announced plans to merge their operations in a $3-billion stock-and-cash deal.
The merger would create a publicly traded company, Reynolds American Inc., to be 42% owned by B&W parent British American Tobacco and 58% by existing shareholders of R.J. Reynolds Tobacco Holdings Inc. If the deal is approved by regulators and stockholders, the combined firm would control about 32% of U.S. cigarette sales, based on current sales of RJR and B&W -- the second- and third-biggest U.S. cigarette makers, respectively.
The companies in recent years have been running a gauntlet between Philip Morris USA, the increasingly dominant market leader, and dozens of upstart discounters, which price their smokes for at least $1 per pack less than premium brands.
The new company still would trail far behind Altria Group Inc.'s Philip Morris, which has about 49% of the market. But executives of the merger partners said the deal would result in cost savings of about $500 million and make them more competitive.
Martin Broughton, chairman of British American Tobacco, said the deal "makes both strategic financial sense" and "will improve our competitive position in the most important cigarette market in the world."
Tommy Payne, executive vice president for external affairs at RJR, said: "It's going to allow the combined companies to be tremendously efficient. It's going to greatly enhance our ability to compete effectively in the U.S. market."
A leading antismoking group blasted the proposed merger as "a marriage of two of the world's most irresponsible tobacco companies." Should the merger be approved, said Matthew L. Myers, president of the Campaign for Tobacco-Free Kids, Reynolds American should "commit to taking concrete steps both domestically and internationally to reduce the harm caused by their deadly products."
The merger was announced after U.S. stock markets closed. Shares of New York Stock Exchange-listed RJR soared $3.72, or 8.6%, in after-hours trading to $46.97. Shares of BAT fell 23 cents to $22.02 on the American Stock Exchange.
RJR, whose top brands include Camel, Salem, Winston and Doral, and B&W, maker of Kool, Pall Mall and Lucky Strike, last year had combined sales of about $10 billion on a volume of 136 billion cigarettes.
But RJR has seen its market share in the last five years dip from 25.2% to 22.8%. B&W has taken a bigger hit, falling from a 15% share to 9.4%.
The merger would require antitrust approval by the Federal Trade Commission, the Justice Department and the Securities and Exchange Commission and the approval of RJR shareholders. Company executives said the transaction was expected to close in 2004.
The deal puts a value of about $2.6 billion on B&W and would include a payment to BAT of $400 million in cash for Lane Ltd., a BAT unit that makes cigars and pipe tobacco and distributes Dunhill cigarettes.
The new company would take over B&W's obligation to make annual payments to the states under the tobacco litigation settlement of 1998, executives said. The company also would have to defend B&W against pending lawsuits and any future litigation by smokers.
Andrew J. Schindler, RJR chairman and chief executive, would serve as executive chairman of the combined company for six months and then become nonexecutive chairman. Susan Ivey, president and CEO of B&W, would become president and CEO of Reynolds American.
The new firm's headquarters and manufacturing center would be in Winston-Salem, N.C., RJR's current home. The area was rocked by RJR's announcement last month of a massive workforce reduction of 40%. The company had said it expected savings of $1 billion through the elimination of 2,600 jobs, nearly two-thirds in Winston-Salem.
By then, secret merger talks were well underway, but Payne said the cutbacks would have occurred anyway. By contrast, the merger would be expected to bring as many as 800 jobs to the Winston-Salem area, Payne said. These would come at the expense of Louisville, Ky., B&W's headquarters, and Macon, Ga., its manufacturing center.