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• Reynolds American says FTC approves planned purchase of Conwood 

Reynolds American Inc., the nation's No. 2 cigarette maker, said Tuesday it has cleared a hurdle at the Federal Trade Commission toward its $3.5 billion purchase of chewing tobacco company Conwood.

The company said the Federal Trade Commission granted it early termination of a waiting period under the Hart-Scott-Rodino Antitrust Improvements Act.

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Reynolds American Inc. Announces Pricing of $1.65 Billion Debt Offering 

Reynolds American Inc. (NYSE: RAI) announced today the pricing of $625 million of its 7 1/4% Senior Secured Notes due 2013, $775 million of its 7 5/8% Senior Secured Notes due 2016, and $250 million of its 7 3/4% Senior Secured Notes due 2018 (collectively, the "Notes") offered in a private offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended, and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act.

RAI intends to use the net proceeds from this offering, together with available cash and borrowings under a new senior secured term loan facility, to finance its previously announced acquisition of a to-be-formed holding company that will own Conwood Company, L.P., Conwood Sales Co., L.P., Rosswil LLC and Scott Tobacco LLC (collectively, "Conwood"). Conwood is the second- largest manufacturer of smokeless tobacco products in the U.S.

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• Reynolds American Inc. to Commence Private Debt Offering 

Reynolds American Inc. (NYSE: RAI) announced today that it is planning a private offer of $1.65 billion aggregate principal amount of senior secured notes due 2013, 2016 and 2018 (the "Notes"). RAI intends to use the net proceeds from this offering, together with available cash and borrowings under a new secured term loan facility, to fund its previously announced agreement to acquire a to-be-formed holding company that will own Conwood Company, L.P., Conwood Sales Company, L.P., Rosswil LLC and Scott Tobacco LLC (collectively, "Conwood").

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• Reynolds Takes a Bite of Chew 

Some analysts wondered after the announcement whether it might also make UST a more attractive acquisition target. The stock hit a month high of $44.92 the day Reynolds announced the Conwood deal. Cigarette companies are strong cash generators, and the most likely purchaser would seem to be Philip Morris, a unit of Altria and the maker of the dominant Marlboro cigarette brand. Both companies declined to comment, but after the price Conwood just pulled down, it would certainly be a costly target.

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Reynolds American May Find It Overpaid for Conwood Growth ($$) 

Chew on this: Reynolds is paying 14 times Conwood's operating profit last year. With Reynolds on a multiple of seven times, that's a huge premium to its own valuation. Moreover, even if one generously factors in 10% annual sales growth over the next three years and synergies equal to 10% of Conwood's net sales, the return on investment looks barely above 6%. That's a big price to pay for lassoing a hedge.

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Smokeless-Tobacco Deal Is Struck ($$) 

Reynolds American Inc. will become the first major cigarette maker in recent years to push into the smokeless-tobacco business, with its agreement to buy closely held snuff and chewing-tobacco company Conwood Co. for $3.5 billion in cash.

The deal will thrust Reynolds, the Winston-Salem, N.C., maker of Camel and Salem cigarettes, into the No. 2 spot in the U.S. smokeless category by market share behind UST Inc. Reynolds is expected to look to expand its Camel cigarette brand by pumping out new smokeless products under that brand name.

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Another Deal to Chew On? 

An analyst at Prudential Equity Group wrote Tuesday that Reynolds “paid through the nose for this business,” and Breakingviews followed up by calling the 14-times-operating-profit multiple a “big price” for a hedge against slowing cigarette sales.

It would be easy to think that this all bodes well for the No. 1 smokeless tobacco maker, UST. With a market capitalization of nearly $7.3 billion, the company had already been pegged as a potential takeover candidate, even before the Conwood deal was announced. And Altria Group, the parent of Reynolds rival Philip Morris USA , wants to expand into other tobacco-related businesses. (Altria is widely assumed to have been a competing bidder in the Conwood auction.)

But many analysts on Tuesday tried to snuff out speculation of an impending UST takeover.

Judy Hong of Goldman Sachs wrote in a research note on Monday that “we believe this news could be negative for UST for a few reasons.”

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Reynolds American Moves into Smokeless Tobacco 

Reynolds American Inc. (RAI) broke into the smokeless tobacco category with the $3.5 billion agreement to purchase a holding company that owns Conwood, the nation's second largest manufacturer of smokeless tobacco products.

Citigroup reported that the acquisition was a "good strategic move for RAI to secure the No. 2 position in the smokeless market and keep it out of the hands of its major competitor, PM (Phillip Morris) USA."

"Conwood provides us with a significant, strategic platform within the growing moist snuff category that would have taken years to build," said Susan M. Ivey, chairman and chief executive officer of Reynolds American. "The moist snuff category has been growing at four percent to five percent for the past five years. Clearly, we're excited by this unique opportunity to gain immediate scale and strength in the category."

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With Purchase, Reynolds Moves Into Smokeless Tobacco Market  

Reynolds expects the deal to add to earnings, but did not update its earnings forecast. Reynolds, which makes Camel and Kool cigarettes, ranks behind Philip Morris USA, a unit of the Altria Group, in the United States cigarette market. Reynolds said it would pay $300 million in cash and borrow $3.2 billion.

A Prudential analyst, Robert T. Campagnino, and a Citigroup analyst, Bonnie Herzog, said Reynolds paid a high price for Conwood.

Ms. Herzog said she nonetheless thought it was a good strategic move for Reynolds because it collected 25 percent of the smokeless market and kept Conwood out of the hands of Philip Morris, the maker of top-selling Marlboro.

"We believe this is an exciting opportunity," she said in a note to investors Tuesday. Ms. Herzog said the purchase would let Reynolds control the price of Conwood's deeply discounted Grizzly smokeless tobacco.

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Independent Online Edition > Business News 

The creep of smoking bans across the Western world has prompted British American Tobacco's US subsidiary to splash out $3.5bn (£2bn) on a business that looks like reviving: the manufacture of chewing tobacco.

Once the preserve of baseball players and the rural poor, chewing tobacco appears once again to be taking off, with one federal government estimate suggesting one in five high-school boys are using it.

And yesterday, Reynolds American - the joint venture created through the merger of BAT's US business and RJ Reynolds in 2004 - said it would buy the privately owned Conwood smokeless tobacco group.

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• Reynolds American Agrees to Buy Conwood for $3.5 Bln (Update8) 

Reynolds American Inc., the second- largest U.S. cigarette company, will jump into the smokeless tobacco market by buying Conwood, maker of the Kodiak and Grizzly brands, for $3.5 billion.

The purchase will give Reynolds the second-largest U.S. manufacturer of snuff and chewing tobacco, the Winston-Salem, North Carolina-based company said in a statement. Conwood is being sold by Chicago's Pritzker family, which controls assets including the Hyatt hotel chain.

Reynolds, the maker of Camel, Doral and Winston cigarettes, is trying to hold on to customers switching to smokeless brands such as UST Inc.'s Copenhagen and Skoal as restaurants and employers ban smoking. The purchase may spur rivals including Altria Group Inc. to enter the $3.8 billion-a-year market, which is growing 5 percent a year.

``The smokeless business is attractive for its growth,'' said Herb Achey, an analyst at New York-based U.S. Trust, which owns Altria, Reynolds and UST shares among about $107 billion in assets. ``We view it as a strategic initiative for Reynolds and Philip Morris.''

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UST Is Boring. For Now. 

If you're still looking for fireworks on the bottom line, you need a cup of coffee, man. With so-so revenues and the current pricing climate for UST's smokeless tobacco, you'd expect the bottom line to shrivel a bit as well, and it did, by 4.9% on an absolute basis, or 2.7% by diluted share. (Share buybacks are handy that way.)

The continuing story here is softness in the premium chewing-tobacco market. Some of that is owed to competition for what have been some pretty fat profits. Of course, money brings competition like flies to a barbecue, and the latest evidence is that Reynolds American (NYSE: RAI) paid up $3.5 billion for UST rival Conwood. That's a hefty 7.8 times sales (or 14 times operating profit).

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Reynolds American Inc. Webcast on Conwood Acquisition 

Reynolds American Inc. (NYSE: RAI webcast a conference call concerning the acquisition of Conwood on Tuesday, April 25, 2006, following its announcement that morning that it will enter the smokeless tobacco market with the acquisition of Conwood, the second-largest U.S. smokeless tobacco company.

During the webcast, Susan M. Ivey, RAI's chairman, president and chief executive officer and other members of the Reynolds American management team discussed the acquisition.

A replay of the the Conwood webcast is available online for 30 days. All remarks made during the webcast were current at the time of the webcast and will not be updated to reflect subsequent material developments.

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FACT SHEET (PDF) 

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• Reynolds American Enters Smokeless Tobacco Category Via Acquisition of Conwood 

Reynolds American Inc. (NYSE: RAI) has agreed to acquire a holding company that owns Conwood, the nation’s second largest manufacturer of smokeless tobacco products, for $3.5 billion. The holding company is owned by business interests of the Pritzker family.

“Conwood provides us with a significant, strategic platform within the growing moist snuff category that would have taken years to build,” said Susan M. Ivey, chairman and chief executive officer of Reynolds American. “The moist snuff category has been growing at 4 percent to 5 percent for the past five years. Clearly, we’re excited by this unique opportunity to gain immediate scale and strength in the category.” . . .

Conwood is the only company to compete in all five segments of the U.S. smokeless tobacco industry, manufacturing moist and dry snuff; and loose leaf, plug and twist chewing tobaccos. Conwood holds the No. 1 or No. 2 position in every segment of the smokeless tobacco market. Moist snuff accounts for more than 70 percent of Conwood’s sales, led by both its premium-priced Kodiak brand and its rapidly growing value-priced Grizzly brand.

Conwood, which traces its roots back to the 1782 founding of the Garrett Snuff Company, operates seven facilities and employs about 900 people in Tennessee, Kentucky and North Carolina.

Reynolds American is also the parent company of R.J. Reynolds Tobacco Company; Santa Fe Natural Tobacco Company, Inc.; R.J. Reynolds Global Products, Inc.; and Lane Limited. Conwood will operate as a subsidiary of Reynolds American. Bill Rosson, Conwood’s chief executive officer, will report to Jeffrey A. Eckmann, Reynolds American’s executive vice president of strategy and business development. Santa Fe Natural Tobacco Co., R.J. Reynolds Global Products and Lane Limited also report to Eckmann.

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