Reynolds arranges $2 billion line of credit

Reynolds arranges $2 billion line of credit

Reynolds American Inc. said in a regulatory filing it has entered into a five-year unsecured credit agreement with eight financial institutions for $2 billion, which could be used to help pay for its $27.4 billion proposed purchase of Lorillard Inc.

The manufacturers announced their deal July 15, essentially for Reynolds to gain top U.S. menthol brand Newport, but also involves rival British manufacturers as key participants. The manufacturers have set Jan. 28 as the date for asking their respective shareholders to approve Reynolds’ offer.

Reynolds and Lorillard are awaiting approval from federal regulators, but both management teams have expressed confidence of completing the transformational deal by June 30, 2015. They have acknowledged submitting additional information twice to the Federal Trade Commission.

Reynolds secured the credit agreement Thursday with JP Morgan Chase and Citibank serving as administrative and syndication agents, respectively. Other participants are Credit Suisse AG, Cayman Islands Branch, Fifth Third Bank, Goldman Sachs Bank USA, Mizuho Bank, Ltd., Royal Bank of Canada and The Bank of Nova Scotia.

The agreement replaces and enhances Reynolds’ previous credit arrangement. Reynolds can request to have the loan amount increased up to $2.35 billion.
Reynolds said it also plans to pay for the Lorillard purchase with: available cash; issuing debt securities; proceeds from the sale of at least four cigarette brands and blu eCigs to Imperial Tobacco Group Ltd.; proceeds from British American Tobacco Plc buying new Reynolds stock so to keep a 42 percent ownership stake; and borrowings under a $9 billion bridge credit agreement put in place Sept. 23.

The new credit agreement comes some restrictive covenants that limit the ability of Reynolds and its subsidiaries to pay dividends and repurchase stock.
Some analysts rate the chance of approval at less than 50 percent because of antitrust concerns.

However, the sale of blu eCigs and the four cigarette brands to Imperial may be enough to ease regulatory concerns about Philip Morris USA (50.7 percent) and Reynolds (33 percent) having almost a combined 84 percent market share.

The divestiture goal is bolstering Imperial enough to convince the FTC that it would be a competitive No. 3 U.S. manufacturer, raising it from a 3 percent market share to at least 10.3 percent.

Wells Fargo Securities analyst Bonnie Herzog estimates the odds of FTC approval at more than 70 percent, “presenting a compelling buying opportunity in both stocks with limited downside risk.”

Imperial has committed to paying $7.1 billion for the brands, as well as to acquire Lorillard’s headquarters and production operations in Greensboro; its plant in Danville, Va.; and the majority of its 2,900-person workforce.

As part of the deal, Murray Kessler, Lorillard’s chairman, chief executive and president, would get compensation of $44.7 million, including $10.7 million in lump-sum cash and $32.8 million in equity and stock performance awards. Kessler would join Reynolds’ board.