Brexit could create world's largest tobacco company

The Brexit vote has made it easier for British American Tobacco to finance a merger with Reynolds American. But in the US, smoking is on a steady decline.

First Look

One industry that isn’t feeling the Brexit pinch? Big tobacco.

British American Tobacco (BAT) has announced its bid to take over US-based tobacco company Reynolds American Inc. BAT already owns a 42 percent stake in Reynolds, and the two share major shareholders like Vanguard Group and BlackRock Investment Management. Observers indicate that the move is a logical step to simplify the structure of the two companies.

But without Brexit, the bid would likely not have been suggested. For multinationals like BAT that receive most of their profit in foreign currencies, the weak pound means business is booming. The ability to access cheap US credit reduces opportunity costs, making it easier to commit to a deal now.

The drop in the pound has hit many individuals and industries hard. Consumer goods imported from Europe or the United States are now around 17 percent more expensive, slimming profit margins for British companies that rely on imports and driving multinationals that operate in Britain to raise prices. Supermarket giant Tesco made headlines last week when it refused to accept Unilever’s price increase, and instead pulled beloved items like Marmite, a yeast spread, from its shelves. (The dispute has since been resolved.)

But BAT already makes most of its profits in overseas markets, including Latin America, Africa, and the Middle East. Since revenue comes in local currency, and comparative costs have fallen at home, the company is able to keep more of its profits. BAT stock has gained more than 12 percent since Brexit.

BAT’s focus on developing-country markets is due in no small part to the success of anti-smoking efforts in Europe and the US. The measures have saved 8 million American lives and a combined 157 million years of life, a 2014 study found. In 2016, the Center for Disease Control reported that only 15.1 percent of American adults had smoked in the past year, an almost 2-percentage-point drop from the previous year. 

Smoking is banned in many workplaces, bars and restaurants, with some cities, including New York and Boston, prohibiting it in public parks, too. High taxes on cigarettes can act as a barrier to use, though a study by the Cato Institute concluded that it would take a 100 percent tax to decrease use by 5 percent.

British and American tobacco companies do face public pressure not to expand into developing markets, where regulations on smoking are less strict and the science may be less well-publicized. That’s one of the reasons these companies can struggle to compete with Asian tobacco producers, the Associated Press suggests.

The companies believe the market for tobacco products remains strong. The merger will give BAT access to luxury US brands, such as Camel, that are in high demand in such countries as Turkey and Russia, and unite the two companies’ efforts in the high-growth sector of so-called e-cigarettes.

Global uncertainty has also helped tobacco, with investors looking for stable consumer goods to invest in. BAT stated that the company’s year-to-date revenue is up 8.1 percent, even taking into account currency fluctuations. Its biggest brands sold 9.8 percent more cigarettes.

In mid-afternoon trading in London, BAT stock was trading up 2.6 percent, indicating that shareholders are optimistic about such a deal, according to The Wall Street Journal.

Material from the Associated Press and Reuters contributed to this report.