Friday, September 25, 2015

Japan Tobacco May be Interested in Reynolds Subsidiary

Japan Tobacco and Reynolds American Inc. may be in advanced talks for another cigarette-access-for-debt-relief deal, according to an industry analyst and media reports.

The speculation this time, as first reported by Bloomberg News, is that Japan Tobacco is willing to offer $5 billion to buy certain assets of Reynolds subsidiary Santa Fe Natural Tobacco Co., which likely includes top-10 cigarette brand Natural American Spirit.

Reynolds declined to comment on the speculation, while Japan Tobacco could not be reached for comment.

Part of the basis for the speculation comes from Reynolds spending $29.25 billion to buy Lorillard Inc., essentially to gain ownership of Newport, the top-selling U.S. menthol brand and No. 2 traditional cigarette.

As part of the megadeal that closed June 12, Reynolds received $7.1 billion from Imperial Tobacco Group Plc for its purchase of four cigarette brands and blu eCigs, as well as $4.7 billion from British American Tobacco Ltd. from buying new Reynolds shares to maintain its 42 percent ownership stake.

During an investors presentation Aug. 3, Andrew Gilchrist, Reynolds’ chief financial officer, said the company’s $17.6 billion on overall long-term debt “is manageable” not only because the company added Newport revenue, but its loans have an average interest rate of 4.5 percent and an average maturity of 12.4 years.

That said, Gilchrist said Reynolds will remain focused on de-leveraging the debt as quickly as possible.

What makes Japan Tobacco an intriguing choice is that the company already has played a key role in Reynolds remaining in existence.

The $25 billion leveraged buyout of Reynolds in 1988-89 left Reynolds with billions in corporate debt that threatened to crush the company. The corporate historic event was detailed in the bestseller “Barbarians at the Gate” and in “Lost Empire: The Fall of R.J. Reynolds Tobacco Co.” by a team of reporters from the Winston-Salem Journal.

Reynolds officials, dealing with that reality, decided in 1998-99 to sell the international rights to its cigarette brands to Japan Tobacco for $8 billion. That deal significantly eased Reynolds’ debt burden from $6.5 billion to $1 billion and provided better cash flow.

However, with that move, Reynolds essentially conceded any global foothold.

Wells Fargo Securities analyst Bonnie Herzog said that if Reynolds were to sell some of its Santa Fe assets, it would be “a win-win scenario” for the company.

“Based on our sum-of-the-parts analysis, we believe Santa Fe is worth $7.6 billion,” Herzog said. Herzog suggested in 2014 that Reynolds might consider selling Santa Fe to help pay for the Lorillard deal.

On Aug. 27, the Food and Drug Administration sent warning letters to Santa Fe, saying that advertising traditional cigarette products as “additive free” or “natural” is in violation of federal regulations.

Santa Fe emphasized the additive-free element of Natural American when it launched the cigarette in 1982, well before Reynolds bought the company for $340 million in December 2001.


Japan Tobacco is the maker of slim premium cigarettes. Buy Glamour Super Slims Azure online.

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