Japan Tobacco fell the most in four and a half years after agreeing to pay about $5 billion for the international rights to Reynolds American’s Natural American Spirit division.
The shares fell as much as 10 per cent in Tokyo trading , and were down 5.6 per cent at 3,740 yen as of 10:03 a.m. local time. The benchmark Topix rose 2.2 per cent.
Tokyo-based JT is offering to pay Natural American Spirit about 22 times more than the pre-tax earnings multiple of tobacco deals from the past five years. This will be the former Japanese monopoly’s biggest acquisition since 2007, when it bought Gallaher Group Plc, maker of Benson & Hedges cigarettes in Europe, for about $19 billion.
"We think the acquisition price can be viewed as overpriced," Satoshi Fujiwara, a Tokyo-based analyst at Nomura, wrote in a note to clients Wednesday. The price "might be able to be justified over the medium term" due to factors such as improved operating margins if in-house production is launched, Fujiwara wrote.
JT’s offer values Natural American Spirit at 286 times 2014 profit before income taxes, compared with the median of 13 times in 79 tobacco company deals over the past five years, according to data compiled by Bloomberg.
The deal is an opportunity for JT to strengthen its tobacco sales growth, particularly in Japan, where Natural American Spirit has strong support from urban adult smokers, JT President Mitsuomi Koizumi said in a statement Tuesday. The all-cash transaction doesn’t include the brand’s U.S. operations, Winston-Salem, North Carolina-based Reynolds said in a separate statement.
“The deal makes sense for Japan Tobacco as it strengthens their portfolio and adds a premium brand that is popular with the younger smoker,” said Duncan Fox, an analyst with Bloomberg Intelligence. “They paid what they had to get a fast-growing asset."
Bloomberg News, edited by ESM
