BAT Said to Eye Higher Bid for Reynolds as Soon as This Week

(Bloomberg) -- British American Tobacco Plc is planning to increase its offer for Reynolds American Inc. as early as this week after the U.S. cigarette maker rejected its last bid as too low, said people familiar with the matter.

A new offer could include a bump in price as well as a higher cash component, the people said, asking not to be identified as the details aren’t public. BAT is aiming to reach an agreement by the end of the year, two of the people said. While BAT hasn’t decided on a final amount, the British firm is unlikely to increase the bid more than 5 percent above the last offer, the people said.

No final decision has been made, and the timing could change, they said. Spokesmen for BAT and Reynolds declined to comment.

BAT’s unsolicited cash-and-stock offer valued Reynolds at $56.50 a share when it was announced in October, an approximately 20 percent premium to the U.S. firm’s previous closing price. The British company’s shares have fallen about 9.9 percent since Oct. 20, the day before the offer was announced, reducing the bid to about $54.50. Reynolds’s stock has climbed 17 percent in that period.

Reynolds shares rose 0.5 percent to $54.95 in New York trading at 10:12 a.m. BAT declined 0.4 percent to 4,329 pence in London.

BAT said it only plans to pursue the deal with Reynolds’s support. Winston-Salem, North Carolina-based Reynolds has created a transaction committee to consider the proposal. BAT estimated an outright merger would create cost synergies of about $400 million.

Reynolds, which makes Camel, Newport and Pall Mall cigarettes, was created in 2004 through a merger of BAT and R.J. Reynolds Tobacco Holdings Inc.’s U.S. businesses. That deal gave BAT a 42 percent stake in the company, which it still holds.

In addition to being the U.S. firm’s largest shareholder, BAT works closely with Reynolds on vapor products and helped fund Reynolds’s takeover of rival cigarette maker Lorillard Inc. last year in a transaction valued at $27.4 billion when it was announced.

--With assistance from Sam Chambers and Phil Serafino To contact the reporters on this story: Manuel Baigorri in London at mbaigorri@bloomberg.net, Ruth David in London at rdavid9@bloomberg.net, Dinesh Nair in London at dnair5@bloomberg.net. To contact the editors responsible for this story: Aaron Kirchfeld at akirchfeld@bloomberg.net, Amy Thomson, Thomas Mulier