British American Tobacco (BAT), which owns 42.2% of Reynolds American, said it made a proposal to acquire the remaining 57.8% of Reynolds for roughly $47 billion.
BAT said its offer values Reynolds at $56.50 per share, of which $24.13 would be in cash and $32.37 would be in BAT shares.
BAT said its offer represents a premium of 20% over the closing price of Reynolds common stock on October 20.
Reynolds shares jumped about 14% to $54, below the offer price.
BAT said a merger of the companies would create the world’s largest listed tobacco company by net turnover and operating profit and a unique portfolio of brands including Newport, Kent and Pall Mall.
It said a merged company would have a leading position in the US tobacco market and a significant presence in high growth emerging markets across South America, Africa, the Middle East and Asia, “together with the most attractive developed markets.”
BAT said US securities laws required it to announce its proposal promptly after it was made to the Reynolds board.
“As a result, BAT has been unable to have prior negotiations with Reynolds regarding the proposal,” said BAT.
BAT CEO Nicandro Durante said: “We have been a shareholder in Reynolds since its creation in 2004 and have benefited from its growth in the US market.
“The acquisition of Lorillard in 2015 has further strengthened Reynolds’s business.
“The proposed merger of our two great companies is the logical progression in our relationship and offers all shareholders a stake in a stronger, truly global tobacco and Next Generation Products company.
“BAT is proud of its track record of consistent delivery for shareholders and this transaction would further strengthen that delivery in the future.”
Guy Ellison, head of UK equities at Investec Wealth & Investment, said: “The timing is a surprise, but the strategic rationale makes perfect sense, pivoting BAT further towards the high value US market, consolidating some strong brands and Reynold’s position in next generation tobacco.
“Despite relatively modest synergies, the deal is still seen adding value for shareholders in the first full-year after completion.
“The ball is now in the court of Reynold’s board and shareholders to consider the offer.”