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RJ Reynolds to buy out BAT’s US unit

New York, Oct. 28 (Reuters): R. J. Reynolds Tobacco Holdings Inc agreed on Monday to buy British American Tobacco Plc’s US cigarette and tobacco businesses for more than $3 billion in cash and stock, creating a stronger competitor to market leader Philip Morris.

The combination of BAT’s Brown & Williamson Tobacco Corp and Lane with R. J. Reynolds Tobacco Co would place brands ranging from R. J. Reynolds’ Camel and Winston to BAT’s Lucky Strike and Kool under one roof. The deal sent the R. J. Reynolds share soaring nearly 10 per cent in after-hours trading.

Combined, the two operations would claim more than 30 per cent of the US cigarette market on about $10 billion in annual sales, based on last year’s figures. The deal will also bring R. J. Reynolds one step closer to Altria Group Inc’s Philip Morris USA, which controls about 49 per cent of the US cigarette market on nearly $18.9 billion in sales.

The transaction is expected to add to both companies’ profits. London-based BAT said it expects the deal to boost its earnings per share by 4 per cent in the first full year after completion, while R. J. Reynolds, based in Winston-Salem, North Carolina, said it would provide more details after it announces third-quarter earnings on Tuesday.

The deal follows R. J. Reynolds’ restructuring plans, unveiled in September, which slashed 40 per cent of its work force in a bid to help save an expected $1 billion by late 2005. The company said it would achieve an additional $500 million in savings from the BAT deal after the US operations are fully integrated.

RJR shares rose to $47.50 in after-hours trading from a close of $43.25 on the New York Stock Exchange. “It’s certainly better for RJR to have this ability to cut some of the marketing and some of the manufacturing costs out,” said David Dreman, chairman of Dreman Value Management, a large investor in the R. J. Reynolds stock.

Tobacco analysts have speculated for months that a deal could occur between R. J. Reynolds and BAT, but expectations for the terms of such an agreement varied. Some believed R. J. Reynolds would be acquired outright by BAT, while others thought the US tobacco industry’s legal woes made combining their US operations more appropriate.

As part of Monday’s deal, R. J. Reynolds will assume Brown & Williamson’s liabilities under the tobacco industry’s 1998 master settlement agreement with US states. R. J. Reynolds will also indemnify Brown & Williamson against any future litigation related to the US business. BAT will, in turn, fund the appropriate cash for the settlement payments, currently expected to average about $750 million a year, an RJR spokesman said.

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