British American Tobacco Plc sold the second-largest bond deal of the year to finance its purchase of the portion of Reynolds American Inc. that it didn't already own.
BAT sold $17.25 billion of dollar-denominated debt in eight parts, the longest of which is a 4.54% 30-year security that yields 1.7 percentage points more than Treasuries. That's down from initial talk between 1.8 percentage points to 1.85 percentage points, according to a person with knowledge of the matter, who asked not to be named because the deal is private.
The proceeds will help permanently finance BAT's 42 billion-pound ($55 billion) purchase of the remaining shares of Reynolds, a deal that will propel BAT to the top position in tobacco-related products globally. The sale is one step in London-based BAT's efforts to raise $25 billion for the deal. It is hoping to sell euro and pound-denominated debt as well. AT&T Inc. sold $22.5 billion of bonds two weeks ago that is the year's biggest U.S. dollar offering.
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"The attractiveness for BAT is that the event risk is in the past," said Dorian Garay, a money manager in New York at NN Investment Partners, which managed 250 billion euros as of April. The company will now just focus on realizing the $400 million of annual cost synergies, he said, which BAT expects will take three years.
BAT said it planned to finance the cash component of the Reynolds buyout with a combination of existing cash resources, new bank credit lines and the issuance of new bonds. The cash component of the final agreement with Reynolds was $24.4 billion.
The FDA's recent plan to regulate the level of nicotine in cigarettes has clouded the outlook for the industry in the U.S., which is the biggest profit pool for tobacco manufacturers. About half of BAT's profits are generated in the U.S. after the purchase of the rest of Reynolds, and with possible regulatory changes investors have grown less enamored of the deal.
"There's a little more uncertainty about the path for this industry, which makes you wonder how quickly this company can de-lever over the next several years," said Mike Collins, senior investment officer in Newark, New Jersey, at PGIM Fixed Income, which managed $676 billion as of June 30. Still, the tobacco industry "if anything has shown itself to be pretty resilient," given its ability to raise prices to offset volume decreases, he said.
Insatiable demand for investment-grade debt has pushed the extra yield that investors demand over Treasuries to the lowest levels since 2014. Issuers have been able to take advantage of low rates to secure cheap financing costs, while investors have been forced to pay up for less compensation.
Bank of America, Barclays, Citigroup, Deutsche Bank and HSBC Securities managed the sale, the person said.
Bloomberg News
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