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Japan Tobacco International Pays $5 Billion to Reynolds American

Published on November 4th, 2015 00:00

Japan Tobacco International dropped to the lowest within a half of the year after approving to pay around $5 billion for the international rights to Reynolds American's Natural American Spirit department. The shares decreased by 6.7 % to 3,695 yen by the close of trading in Tokyo, to the lowest stage from March 20. The benchmark Topix went up by 2.6 %.

Tokyo-based JT is recommending to pay Natural American Spirit around 22 times over the pretax revenue multiple of tobacco offers from the previous five years. This will be the ex - Japanese monopoly’s largest purchase from 2007, when it acquired Gallaher Group, manufacturer of Benson & Hedges cigarettes in Europe, for around $19 billion. "We consider that the purchase price can be seen as too expensive," Satoshi Fujiwara, a Tokyo-based expert at Nomura, explained in a note to clients Wednesday. The price "could be able to be validated over the medium term" as a result of several factors like for example increased operating margins if in-house manufacturing is released, Fujiwara wrote.

JT’s deal values Natural American Spirit at 286 times 2014 revenue before income taxes, in contrast to the average of 13 times in 79 tobacco company offers over the past five years, based on records published by Bloomberg.

The offer is a great chance for JT to reinforce its tobacco sales increase, most of all in Japan, where Natural American Spirit has solid support from urban adult cigarette users, JT President Mitsuomi Koizumi explained in a statement Tuesday. The all-cash transaction does not contain the brand’s U.S. procedures, Winston-Salem, North Carolina-based Reynolds explained in a separate declaration.

That company’s shares went up by 1 % to $43.91 on Wednesday in New York. “The offer is a good idea for Japan Tobacco as it fortifies their portfolio and brings a premium brand that is famous with the younger smoker,” stated Duncan Fox, an analyst with Bloomberg Intelligence. “They paid what they had to receive a fast-growing asset."