British American Tobacco to Merge with Reynolds Cigarettes

Over the last two decades, the U.S. has seen a significant decline in the use of tobacco products. Fewer people are smoking cigars and cigarettes. Likewise, fewer people are staying away from products like chewing tobacco and snuff. Despite the massive push to stop tobacco use in the U.S., use of these products continues to surge elsewhere. Tobacco companies in the U.S. are now looking overseas for partners and growth opportunities that are not available on the American market.

British American Tobacco’s Investment in Reynolds America

The British American Tobacco company recently announced that it plans to buy stakes in Reynolds America. It already has some stakes in the company. However, it wants to buy stakes that it currently does not own. The price that British American Tobacco is willing to pay tops $49 billion. This amount proves to be staggering to many who thought the American tobacco industry was by and large dead in the water.

The deal also expands the reach of well-known tobacco products Camel, Lucky Strike, Pall Mall, and Newport to new locales around the world. Previously, these products were largely restricted to the American market. The sales of all of these cigarette brands saw a huge decline as public awareness campaigns compelled people to stop smoking.

However, with British American Tobacco buying stakes in American Reynolds to the tune of more than $59 per share, these cigarettes are expected to become more popular other places around the world such as Africa, India, and Asia. They offer the appeal of a Western product as well as a level of quality not seen in many tobacco products made in other countries. The $49 billion deal could help both companies rake in dividends that surpass the cost of British American Tobacco’s initial investment. The deal was brokered by powerhouse entities like Deutsche Bank, USB, and Goldman Sachs. If approved, the partnership could create a new tobacco empire that has the potential to expand into and overtake smaller tobacco companies throughout the world.

Tobacco Industry’s Potential in Africa

Since it was largely shut out of the American and British markets, Big Tobacco has had to look elsewhere for its livelihood. Out of all of the places where tobacco use is still largely accepted, Africa has proven to be the richest market for this industry, primarily because African countries enact few prohibitions against the advertising and sale of cigarettes, cigars, and other similar products.

With few restrictions, Big Tobacco companies like American Reynolds and British American Tobacco have free rein to sell their products as they wish. In the U.S. and other Western countries, companies generally must sell individual packs that contain at least 20 cigarettes. In Africa, however, it is perfectly legal to sell individual cigarettes for just a few cents apiece. The low price and option to just buy one or two cigarettes at a time appeals to people who subsist on a few dollars a day.

Likewise, some African countries like South Africa prohibit the advertising of cigarettes and cigars on TV and radio. Because a fair portion of the population in some parts of Africa have limited access to such advertisements, the warnings to avoid tobacco have yet to concern many people in that part of the world.

Finally, it is legal for the youngest of children to smoke. Children as young as 12 or 13 buy cigarettes and smoke on a daily basis, creating a market that is ripe for Big Tobacco entities like American Reynolds. American Reynolds can expect to do well and survive into the future thanks to a new $49 billion deal with British American Tobacco that could expand its growth and reach.
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