DEFA14A 1 d414117ddefa14a.htm DEFA14A DEFA14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934 (Amendment No.    )

 

 

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material Pursuant to §240.14a-12

REYNOLDS AMERICAN INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies:

 

     

  (2)  

Aggregate number of securities to which transaction applies:

 

     

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

     

  (4)  

Proposed maximum aggregate value of transaction:

 

     

  (5)  

Total fee paid:

 

     

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

     

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

 

     

 

 

 


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Disclaimer Important ACCESS TO THIS WEBSITE MAY BE RESTRICTED UNDER SECURITIES LAWS OR REGULATIONS IN CERTAIN JURISDICTIONS OUTSIDE OF THE UNITED STATES AND THE UNITED KINGDOM. THIS NOTICE REQUIRES YOU TO CONFIRM CERTAIN MATTERS (INCLUDING THAT YOU ARE NOT A RESIDENT OF SUCH A JURISDICTION), BEFORE YOU MAY OBTAIN ACCESS TO THE INFORMATION ON THIS WEBSITE. THESE MATERIALS ARE NOT DIRECTED AT OR TO BE ACCESSED BY PERSONS WHO ARE RESIDENTS OF ANY JURISDICTION OUTSIDE OF THE UNITED STATES OR THE UNITED KINGDOM WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THAT JURISDICTION. In connection with the proposed merger of British American Tobacco p.I.c. (UBAT’:) and Reynolds American Inc. (‘Reynolds’) (the “Proposed Transaction”), you acknowledge the following: Access to this website You are attempting to enter a website that is designated for the publication of documents and information in connection with the Proposed Transaction. If you would like to access this website, please read this notice carefully. This notice applies to all persons who view this website and, depending on where you are located, may affect your rights or responsibilities. BAT and Reynolds reserve the right to amend or update this notice at any time and you should, therefore, read it in full each time you visit the site. In addition, the contents of this website may be amended at any time, in whole or in part, at the sole discretion of BAT or Reynolds. By clicking “Agree”, I acknowledge and agree to the terms and/or the other statements set forth above. Agree


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Disclaimer time and you should, therefore, read it in full each time you visit the site. In addition, the contents of this website may be amended at any time, in A whole or in part, at the sole discretion of BAT or Reynolds. This website contains electronic versions of materials relating to the Proposed Transaction. The materials you are seeking to access are made available for information purposes only and are subject to the terms and conditions set out below. Any person seeking to access this website represents and warrants to BAT and Reynolds that they are doing so for information purposes only. To allow you to view information about the Proposed Transaction, you must read this notice and then click “AGREE”. If you are unable to agree, you should not click “AGREE” and you will not be able to view information about the Proposed Transaction. If you are in any doubt about the contents of this website or the action you should take, you are recommended to seek your own personal financial, legal or tax advice from your stockbroker, bank manager, solicitor, accountant or other financial adviser authorised under the Financial Services and Markets Act 2000 (as amended) or, if you are located outside the United Kingdom, from an appropriately authorized independent financial adviser. Jurisdictions Outside of the United States and the United Kingdom Viewing the materials you are seeking to access may be restricted under securities laws in certain jurisdictions outside of the United States and the United Kingdom. These materials are not directed at or accessible by persons resident in any jurisdiction outside of the United States or the United Kingdom if to do so would constitute a violation of the relevant laws or regulations of that jurisdiction. Residents of the United States and the United Kingdom are not restricted from accessing this website, subject to the review and agreement with this notice. YOU SHOULD NOT DOWNLOAD, MAIL, FORWARD, DISTRIBUTE, SEND OR SHARE THE INFORMATION OR DOCUMENTS CONTAINED ON THIS WEBSITE TO OR WITH ANY PERSON. IN PARTICULAR, YOU SHOULD NOT MAIL, FORWARD, DISTRIBUTE OR SEND THE INFORMATION OR DOCUMENTS CONTAINED THEREIN TO ANY JURISDICTION WHERE IT WOULD BE UNLAWFUL TO DO SO. Agree By clicking “Agree”, I acknowledge and agree to the terms and/or the other statements set forth above.


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Disclaimer It is your responsibility to satisfy’ yourself as to the full observance of any relevant laws and regulatory requirements outside the United States and the United Kingdom. Any failure to do so may constitute a violation of the applicable laws and regulations. If you are in any doubt, you should not continue to seek to access this website. To the fullest extent permitted by applicable law, BAT and Reynolds disclaim any responsibility or liability for any such violations. Forward looking statements Certain statements in this website and the materials posted on this website, including any statements regarding the Proposed Transaction, the expected timetable for completing the Proposed Transaction, the benefits and synergies of the Proposed Transaction, future opportunities for the combined company and any other statements regarding BAT’s, Reynolds’s or the combined company’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts are “forward-looking” statements made within the meaning of Section 21E of the United States Securities Exchange Act of 1934. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or statistical data. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: whether the conditions to the Proposed Transaction will be satisfied and the Proposed Transaction will be completed on the anticipated timeframe, or at all; the failure to realize contemplated synergies and other benefits from the Proposed Transaction; the incurrence of significant costs and the availability and cost of financing in connection with the Proposed Transaction; the effect of the announcement of the Proposed Transaction, and related uncertainties as to whether the Proposed Transaction will be completed, on BAT’s, Reynolds’s or the combined company’s ability to retain customers, retain and hire key personnel and maintain relationships with suppliers and on their operating results and businesses generally; the ability to maintain credit ratings; changes in the tobacco industry and stock market trading conditions; changes or differences in domestic or international economic or political conditions; changes in tax laws and rates; the impact of adverse legislation and regulation; the ability to develop, produce or market new alternative products profitably; the ability to effectively implement v strategic initiatives and actions taken to increase sales growth; the ability to enhance cash generation and pay dividends; adverse litigation and Agree By clicking ‘Agree1,1 acknowledge and agree to the terms and/or the other statements set forth above.


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Disclaimer dispute outcomes; and changes in the market position, businesses, financial condition, results of operations or prospects of BAT, Reynolds or the combined company. Additional information concerning these and other factors can be found in Reynolds’s filings with the U.S. Securities and Exchange Commission (“SEC”), including Reynolds’s most recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which may be obtained free of charge at the SEC’s website, http://www.sec.gov, and BAT’s Annual Reports, which may be obtained free of charge from BAT’s website www.bat.com. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof and Reynolds and BAT undertake no obligation to update or revise publicly any forward-looking statements or other data or statements contained within this website, whether as a result of new information, future events or otherwise. Additional information and where to find it This website and the materials posted on this website are neither solicitations of a proxy nor substitutes for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Any solicitation will only be made through materials filed with the SEC. Nonetheless, this website or the materials posted on this website may be deemed to be solicitation material in respect of the Proposed Transaction by BAT or Reynolds. BAT and Reynolds have filed relevant materials with the SEC, including a registration statement on Form F-4 that includes a proxy statement of Reynolds that also constitutes a prospectus of BAT. On June 14, 2017, the SEC declared the registration statement effective. Reynolds commenced mailing the definitive proxy statement/prospectus to holders of Reynolds common stock on or about June 14, 2017. Investors and security holders are urged to read the definitive proxy statement/prospectus, which was also filed with the SEC on June 14, 2017, together with all other relevant documents filed with the SEC, because they contain important information about the Proposed Transaction. Investors and security holders may obtain the documents free of charge at the SEC’s website, http://www.sec.gov or for free from BAT upon request to BAT at batir@bat.com / +44 (0) 20 7845 1000 (for documents filed with the SEC by BAT) or from Reynolds at raiinvestorrelations@reynoldsamerican.com / +1 (336) 741-5165 (for documents filed with the SEC by Reynolds). Agree By clicking “Agree”, I acknowledge and agree to the terms and/or the other statements set forth above.


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Disclaimer Participants in solicitation This website and the materials posted on this website are neither solicitations of a proxy nor substitutes for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Nonetheless, BAT, Reynolds and their affiliates and each of their directors and executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the holders of Reynolds common stock with respect to the Proposed Transaction. Information about such parties and a description of their interests are set forth in BAT’s 2016 Annual Report, which may be obtained free of charge from BAT’s website www.bat.com and Reynolds’s annual report for the year ended December 31, 2016, which was filed on Form 10-K with the SEC on February 9, 2017, Reynolds’s Form 10-K/A, which was filed with the SEC on March 20, 2017 and Reynolds’s definitive proxy statement/prospectus, which was filed with the SEC on June 14, 2017 (such filings by Reynolds, collectively, “Reynolds SEC filings”). To the extent holdings of Reynolds securities by such parties have changed since the amounts contained in the Reynolds SEC Filings, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interest of such parties is also included in the materials that BAT and Reynolds have filed with the SEC in connection with the Proposed Transaction. These documents may be obtained free of charge from the SEC’s website http://www.sec.gov or from BAT and Reynolds using the contact information above. Non-solicitation This website and the materials posted on this website shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended. This website and the materials posted on this website should not be construed as, investment advice and is not intended to form the basis of any investment decision, nor does it form the basis of any contract for acquisition or investment in any member of the Group, financial promotion or any offer, invitation or recommendation in relation to any acquisition of, or investment in, any member of the Group. Agree By clicking “Agree”, I acknowledge and agree to the terms and/or the other statements set forth above.


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Disclaimer in BAT’s 2016 Annual Report, which may be obtained free of charge from BAT’s website www.bat.com and Reynolds’s annual report for the year A ended December 31, 2016, which was filed on Form 10-K with the SEC on February 9: 2017, Reynolds’s Form 10-K/A, which was filed with the SEC on March 20, 2017 and Reynolds’s definitive proxy statement/prospectus, wfiich was filed with the SEC on June 14, 2017 (such filings by Reynolds, collectively, ‘Reynolds SEC filings”). To the extent holdings of Reynolds securities by such parties have changed since the amounts contained in the Reynolds SEC Filings, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interest of such parties is also included in the materials that BAT and Reynolds have filed with the SEC in connection with the Proposed Transaction. These documents may be obtained free of charge from the SEC’s website http://www.sec.gov or from BAT and Reynolds using the contact information above. Non-solicitation This website and the materials posted on this website shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended. This website and the materials posted on this website should not be construed as, investment advice and is not intended to form the basis of any investment decision, nor does it form the basis of any contract for acquisition or investment in any member of the Group, financial promotion or any offer, invitation or recommendation in relation to any acquisition of, or investment in, any member of the Group. Non-GAAP financial measures This website and the materials posted on this website contain non-GAAP financial measures. Non-GAAP financial measures should be considered only as a supplement to, and not as a substitute for or as a superior measure to, financial measures prepared in accordance with GAAP. Agree By clicking “Agree”, I acknowledge and agree to the terms and/or the other statements set forth above.


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Press Releases June 14, 2017 PUBLICATION OF CIRCULAR AND PROSPECTUS IN CONNECTION WITH THE PROPOSED ACQUISITION OF REYNOLDS AMERICAN INC. June 14, 2017 REYNOLDS AMERICAN INC. ANNOUNCES NOTICE OF SPECIAL MEETING OF SHAREHOLDERS May 31, 2017 RAI POST-ACQUISITION LEADERSHIP TEAM ANNOUNCED April 5, 2017 PROPOSED BAT ACQUISITION OF RAI GAINS JAPAN ANTITRUST APPROVAL April 5, 2017 PROPOSED ACQUISITION OF REYNOLDS - BAT OBTAINS ANTITRUST APPROVAL IN JAPAN March 9, 2017 PROPOSED BAT ACQUISITION OF RAI CLEARS U.S. ANTITRUST HURDLE


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March 9, 2017 PROPOSED ACQUISITION OF REYNOLDS - U.S. ANTITRUST CONDITION SATISFIED January 17, 2017 BAT ANNOUNCES AGREEMENT TO ACQUIRE REYNOLDS January 17, 2017 REYNOLDS AMERICAN ANNOUNCES ENTRY INTO MERGER AGREEMENT WITH BRITISH AMERICAN TOBACCO © 2017 BAT Announces Agreement to Acquire Reynolds American All rights reserved. Important Information


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Link to BAT’s SEC EDGAR Page Link to RAI’s SEC EDGAR Page June 14, 2017 BAT UK CIRCULAR TO SHAREHOLDERS (INCLUDING THE NOTICE OF GENERAL MEETING) ^ June 14, 2017 BAT UK PROSPECTUS June 14, 2017 BAT FORM 424B3 June 14, 2017 RAI SCHEDULE 14A June 14, 2017 BAT SCHEDULE 13E-3 June 14, 2017 RAI SCHEDULE 13E-3 June 9, 2017 BAT SCHEDULE 13 D/A


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June 9, 2017 RAI FORM 8-K January 17, 2017 RAI FORM 8-K January 17, 2017 BAT SCHEDULE 13D/A October 21, 2016 BAT SCHEDULE 13D/A September 16, 2016 BAT SCHEDULE 13D/A July 26, 2016 BAT SCHEDULE 13D/A June 19, 2015 BAT SCHEDULE 13D © 2017 BAT Announces Agreement to Acquire Reynolds American All rights reserved. Important Information


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Important

ACCESS TO THIS WEBSITE MAY BE RESTRICTED UNDER SECURITIES LAWS OR REGULATIONS IN CERTAIN JURISDICTIONS OUTSIDE OF THE UNITED STATES AND THE UNITED KINGDOM. THIS NOTICE REQUIRES YOU TO CONFIRM CERTAIN MATTERS (INCLUDING THAT YOU ARE NOT A RESIDENT OF SUCH A JURISDICTION), BEFORE YOU MAY OBTAIN ACCESS TO THE INFORMATION ON THIS WEBSITE. THESE MATERIALS ARE NOT DIRECTED AT OR TO BE ACCESSED BY PERSONS WHO ARE RESIDENTS OF ANY JURISDICTION OUTSIDE OF THE UNITED STATES OR THE UNITED KINGDOM WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THAT JURISDICTION.

In connection with the proposed merger of British American Tobacco p.l.c. (“BAT”) and Reynolds American Inc. (“Reynolds”) (the “Proposed Transaction”), you acknowledge the following:

Access to this website

You are attempting to enter a website that is designated for the publication of documents and information in connection with the Proposed Transaction.


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If you would like to access this website, please read this notice carefully. This notice applies to all persons who view this website and, depending on where you are located, may affect your rights or responsibilities. BAT and Reynolds reserve the right to amend or update this notice at any time and you should, therefore, read it in full each time you visit the site. In addition, the contents of this website may be amended at any time, in whole or in part, at the sole discretion of BAT or Reynolds.

This website contains electronic versions of materials relating to the Proposed Transaction. The materials you are seeking to access are made available for information purposes only and are subject to the terms and conditions set out below. Any person seeking to access this website represents and warrants to BAT and Reynolds that they are doing so for information purposes only.

To allow you to view information about the Proposed Transaction, you must read this notice and then click “AGREE”. If you are unable to agree, you should not click “AGREE” and you will not be able to view information about the Proposed Transaction.

If you are in any doubt about the contents of this website or the action you should take, you are recommended to seek your own personal financial, legal or tax advice from your stockbroker, bank manager, solicitor, accountant or other financial adviser authorised under the Financial Services and Markets Act 2000 (as amended) or, if you are located outside the United Kingdom, from an appropriately authorized independent financial adviser.

Jurisdictions Outside of the United States and the United Kingdom

Viewing the materials you are seeking to access may be restricted under securities laws in certain jurisdictions outside of the United States and the United Kingdom. These materials are not directed at or accessible by persons resident in any jurisdiction outside of the United States or the United Kingdom if to do so would constitute a violation of the relevant laws or regulations of that jurisdiction. Residents of the United States and the United Kingdom are not restricted from accessing this website, subject to the review and agreement with this notice.


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YOU SHOULD NOT DOWNLOAD, MAIL, FORWARD, DISTRIBUTE, SEND OR SHARE THE INFORMATION OR DOCUMENTS CONTAINED ON THIS WEBSITE TO OR WITH ANY PERSON. IN PARTICULAR, YOU SHOULD NOT MAIL, FORWARD, DISTRIBUTE OR SEND THE INFORMATION OR DOCUMENTS CONTAINED THEREIN TO ANY JURISDICTION WHERE IT WOULD BE UNLAWFUL TO DO SO.

It is your responsibility to satisfy yourself as to the full observance of any relevant laws and regulatory requirements outside the United States and the United Kingdom. Any failure to do so may constitute a violation of the applicable laws and regulations. If you are in any doubt, you should not continue to seek to access this website. To the fullest extent permitted by applicable law, BAT and Reynolds disclaim any responsibility or liability for any such violations.

Forward looking statements

Certain statements in this website and the materials posted on this website, including any statements regarding the Proposed Transaction, the expected timetable for completing the Proposed Transaction, the benefits and synergies of the Proposed Transaction, future opportunities for the combined company and any other statements regarding BAT’s, Reynolds’s or the combined company’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts are “forward-looking” statements made within the meaning of Section 21E of the United States Securities Exchange Act of 1934. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or statistical data. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: whether the conditions to the Proposed Transaction will be satisfied and the Proposed Transaction will be completed on the


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anticipated timeframe, or at all; the failure to realize contemplated synergies and other benefits from the Proposed Transaction; the incurrence of significant costs and the availability and cost of financing in connection with the Proposed Transaction; the effect of the announcement of the Proposed Transaction, and related uncertainties as to whether the Proposed Transaction will be completed, on BAT’s, Reynolds’s or the combined company’s ability to retain customers, retain and hire key personnel and maintain relationships with suppliers and on their operating results and businesses generally; the ability to maintain credit ratings; changes in the tobacco industry and stock market trading conditions; changes or differences in domestic or international economic or political conditions; changes in tax laws and rates; the impact of adverse legislation and regulation; the ability to develop, produce or market new alternative products profitably; the ability to effectively implement strategic initiatives and actions taken to increase sales growth; the ability to enhance cash generation and pay dividends; adverse litigation and dispute outcomes; and changes in the market position, businesses, financial condition, results of operations or prospects of BAT, Reynolds or the combined company.

Additional information concerning these and other factors can be found in Reynolds’s filings with the U.S. Securities and Exchange Commission (“SEC”), including Reynolds’s most recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which may be obtained free of charge at the SEC’s website, http://www.sec.gov, and BAT’s Annual Reports, which may be obtained free of charge from BAT’s website www.bat.com. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof and Reynolds and BAT undertake no obligation to update or revise publicly any forward-looking statements or other data or statements contained within this website, whether as a result of new information, future events or otherwise.

Additional information and where to find it

This website and the materials posted on this website are neither solicitations of a proxy nor substitutes for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Any solicitation will only be made through materials filed with the SEC. Nonetheless, this website or the materials posted on this website may be deemed to be solicitation material in respect of the Proposed Transaction by BAT or Reynolds.


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BAT and Reynolds have filed relevant materials with the SEC, including a registration statement on Form F-4 that includes a proxy statement of Reynolds that also constitutes a prospectus of BAT. On June 14, 2017, the SEC declared the registration statement effective. Reynolds commenced mailing the definitive proxy statement/prospectus to holders of Reynolds common stock on or about June 14, 2017. Investors and security holders are urged to read the definitive proxy statement/prospectus, which was also filed with the SEC on June 14, 2017, together with all other relevant documents filed with the SEC, because they contain important information about the Proposed Transaction. Investors and security holders may obtain the documents free of charge at the SEC’s website, http://www.sec.gov or for free from BAT upon request to BAT at batir@bat.com / +44 (0) 20 7845 1000 (for documents filed with the SEC by BAT) or from Reynolds at raiinvestorrelations@reynoldsamerican.com / +1 (336) 741-5165 (for documents filed with the SEC by Reynolds).

Participants in solicitation

This website and the materials posted on this website are neither solicitations of a proxy nor substitutes for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Nonetheless, BAT, Reynolds and their affiliates and each of their directors and executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the holders of Reynolds common stock with respect to the Proposed Transaction. Information about such parties and a description of their interests are set forth in BAT’s 2016 Annual Report, which may be obtained free of charge from BAT’s website www.bat.com and Reynolds’s annual report for the year ended December 31, 2016, which was filed on Form 10-K with the SEC on February 9, 2017, Reynolds’s Form 10-K/A, which was filed with the SEC on March 20, 2017 and Reynolds’s definitive proxy statement/prospectus, which was filed with the SEC on June 14, 2017 (such filings by Reynolds, collectively, “Reynolds SEC filings”). To the extent holdings of Reynolds securities by such parties have changed since the amounts contained in the Reynolds SEC Filings, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interest of such parties is also included in the materials that BAT and Reynolds have filed with the SEC in connection with the Proposed Transaction. These documents may be obtained free of charge from the SEC’s website http://www.sec.gov or from BAT and Reynolds using the contact information above.


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Non-solicitation

This website and the materials posted on this website shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

This website and the materials posted on this website should not be construed as, investment advice and is not intended to form the basis of any investment decision, nor does it form the basis of any contract for acquisition or investment in any member of the Group, financial promotion or any offer, invitation or recommendation in relation to any acquisition of, or investment in, any member of the Group.

Non-GAAP financial measures

This website and the materials posted on this website contain non-GAAP financial measures. Non-GAAP financial measures should be considered only as a supplement to, and not as a substitute for or as a superior measure to, financial measures prepared in accordance with GAAP.

 

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NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN OR INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION.

THIS ANNOUNCEMENT IS AN ADVERTISEMENT AND DOES NOT CONSTITUTE A PROSPECTUS OR PROSPECTUS EQUIVALENT DOCUMENT. INVESTORS SHOULD NOT MAKE ANY INVESTMENT DECISION IN RELATION TO THE NEW BAT SHARES BASED ON THIS ANNOUNCEMENT.

BRITISH AMERICAN TOBACCO P.L.C.

Publication of Circular and Prospectus in connection with the Proposed Acquisition of Reynolds American Inc.

British American Tobacco p.l.c. (“BAT”) is pleased to announce that the UK Listing Authority has approved a Class 1 circular (the “Circular”) and a prospectus (the “Prospectus”) (dated 14 June 2017) in relation to its recommended offer to acquire the remaining 57.8% of Reynolds American Inc. (“Reynolds”) that it does not already own (the “Proposed Acquisition”).

The Circular contains a notice convening a general meeting of BAT, which is to be held at 2.00pm on 19 July 2017 at Hilton London Bankside, 2-8 Great Suffolk Street, London SE1 0UG, United Kingdom, at which the resolution to approve the Proposed Acquisition and the authority for the Directors of BAT to allot and issue new BAT shares in connection with the Proposed Acquisition will be proposed.

The Prospectus relates to the proposed issue of new ordinary shares in connection with the Proposed Acquisition and the application for admission of new ordinary shares to the premium listing segment of the Official List and to trading on the main market for listed securities of the London Stock Exchange.

Subject to the satisfaction or waiver of the conditions as set out in the merger agreement, including approval of shareholders of both BAT and Reynolds, the expected effective date of the completion of the Proposed Acquisition is on or around 25 July 2017.

Availability of the Circular and Prospectus

Copies of the Circular will be circulated in hard copy to those BAT shareholders who have elected to receive it in that form. Other BAT shareholders will be sent notification that the Circular is available online. The Circular and the Prospectus will be made available in electronic form on BAT’s website at http://www.bat.com/reynolds and will be available for inspection at the Company’s registered office at Globe House, 4 Temple Place, London WC2R 2PG, between the hours of 9.30am and 5.30pm on any Business Day from today’s date up to and including the conclusion of the Proposed Acquisition.

The Circular, together with related forms of proxy, and the Prospectus have also been submitted to the National Storage Mechanism, where they will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

14 June 2017

ENQUIRIES

British American Tobacco Press Office

+44 (0) 20 7845 2888 (24 hours) | @BATPress

British American Tobacco Investor Relations

Mike Nightingale / Rachael Brierley / Sabina Marshman

+44 (0) 20 7845 1180 / 1519/ 1781


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FTI Consulting (UK PR agency)

John Waples: +44 (0)20 3727 1515

Edward Bridges: +44 (0)20 3727 1067

David Waller: +44 (0)20 3727 1651

Sard Verbinnen & Co. (US PR agency)

US: George Sard / Jim Barron: +1 212 687 8080

UK: Michael Henson: +44 (0)20 3178 8914

Centerview Partners

UK: Nick Reid / Hadleigh Beals: +44 (0)207 409 9700

US: Blair Effron: +1 212 380 2650

Deutsche Bank

UK: Nigel Meek / James Ibbotson

Matt Hall / Jimmy Bastock (Corporate Broking)

+44 (0)207 545 8000

US: James Stynes: +1 212 250 2500

UBS

John Woolland / James Robertson

David Roberts / Alia Malik (Corporate Broking)

+44 (0)207 568 1000

NOTES TO EDITORS

About BAT

BAT is a global tobacco group with brands sold in more than 200 markets. It employs more than 50,000 people worldwide and has over 200 brands in its portfolio, with its cigarettes chosen by around one in eight of the world’s one billion smokers. BAT has market leading positions in at least 55 markets around the world. The Group generated £5 billion adjusted profit from operations in 2016.

Centerview Partners, Deutsche Bank and UBS are acting as financial advisers to BAT. Deutsche Bank and UBS are joint corporate brokers to BAT and acting as joint sponsors to BAT in relation to the transaction described in this announcement. Cravath, Swaine & Moore LLP and Herbert Smith Freehills LLP are acting for BAT as US and UK legal counsel respectively. PwC are acting as accountants and advisors to BAT on the transaction described in this announcement.

Centerview Partners UK LLP (“Centerview Partners”) is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Centerview Partners is acting exclusively for BAT and no one else in connection with the transaction described in this announcement. Centerview Partners will not regard any other person as its client in relation to the transaction described in this announcement and will not be responsible to any person other than BAT for providing the protections afforded to clients of Centerview Partners or for providing advice in relation to the transaction described in this announcement or any other matter referred to herein.

Deutsche Bank AG is authorised under German Banking Law (competent authority: European Central Bank) and, in the United Kingdom, by the Prudential Regulation Authority. It is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal Financial Supervisory Authority, and is subject to limited regulation in the United Kingdom by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of its authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority, are available on request or from www.db.com/en/content/eu_disclosures.htm.

Deutsche Bank AG, acting through its London branch (“DB London”), and Deutsche Bank Securities Inc. (“DBSI” and with DB London, “DB”) are acting as joint financial adviser and DB London is acting as joint corporate broker and joint sponsor to BAT. DB are acting exclusively for BAT and no one else in connection with the transaction described in this announcement. DB will not regard any other person as their client in relation to the transaction described in this


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announcement and will not be responsible to any person other than BAT for providing the protections afforded to clients of DB or for providing advice in relation to the transaction described in this announcement or any other matter referred to herein.

UBS Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom. UBS Limited is acting exclusively for BAT and no one else in connection with the transaction described in this announcement. UBS Limited will not regard any other person as its client in relation to the transaction described in this announcement and will not be responsible to any person other than BAT for providing the protections afforded to clients of UBS Limited or for providing advice in relation to the transaction described in this announcement or any other matter referred to herein.

Apart from the responsibilities and liabilities, if any, which may be imposed on it by the Financial Services and Markets Act 2000, none of Centerview Partners, DB or UBS Limited accepts any responsibility whatsoever and makes no representation or warranty, express or implied, as to the contents of this announcement, including its accuracy, fairness, sufficiency, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with BAT or the transaction described in this announcement, and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Each of Centerview Partners, DB and UBS Limited accordingly disclaims to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise (save as referred to above) which it might otherwise have in respect of this announcement.

For further information

A copy of this announcement will be made available, subject to certain jurisdiction restrictions, on BAT’s website at BATReynolds.transactionannouncement.com. For the avoidance of doubt, the contents of this website is not incorporated into and does not form part of this announcement.

Overseas jurisdictions

The release, publication or distribution of this announcement in or into jurisdictions other than the United States or the United Kingdom may be restricted by law and therefore any persons who are subject to the law of any jurisdiction other than the United States or the United Kingdom should inform themselves about, and observe, any applicable legal or regulatory requirements. Any failure to comply with the applicable restrictions may constitute a violation of the securities laws of any such jurisdiction. To the fullest extent permitted by applicable law, the companies and persons involved in the transaction disclaim any responsibility or liability for the violation of such restrictions by any person.

Copies of this announcement and formal documentation relating to the transaction will not be and must not be, mailed or otherwise forwarded, distributed or sent in, into or from any jurisdiction outside of the United States and the United Kingdom where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction. Doing so may render invalid any related purported vote in respect of the transaction.

Forward looking statements

Certain statements in this communication regarding the Proposed Acquisition, the expected timetable for completing the Proposed Acquisition, the benefits and synergies of the Proposed Acquisition, future opportunities for the combined company and any other statements regarding BAT’s, Reynolds’s or the combined company’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts are “forward-looking” statements made within the meaning of Section 21E of the United States Securities Exchange Act of 1934. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or statistical data within


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this communication. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: whether the conditions to the Proposed Acquisition will be satisfied and the Proposed Acquisition will be completed on the anticipated timeframe, or at all; the failure to realize contemplated synergies and other benefits from the Proposed Acquisition; the incurrence of significant costs and the availability and cost of financing in connection with the Proposed Acquisition; the effect of the announcement of the Proposed Acquisition, and related uncertainties as to whether the Proposed Acquisition will be completed, on BAT’s, Reynolds’s or the combined company’s ability to retain customers, retain and hire key personnel and maintain relationships with suppliers and on their operating results and businesses generally; the ability to maintain credit ratings; changes in the tobacco industry and stock market trading conditions; changes or differences in domestic or international economic or political conditions; changes in tax laws and rates; the impact of adverse legislation and regulation; the ability to develop, produce or market new alternative products profitably; the ability to effectively implement strategic initiatives and actions taken to increase sales growth; the ability to enhance cash generation and pay dividends; adverse litigation and dispute outcomes; and changes in the market position, businesses, financial condition, results of operations or prospects of BAT, Reynolds or the combined company.

Additional information concerning these and other factors can be found in Reynolds’s filings with the U.S. Securities and Exchange Commission (“SEC”), including Reynolds’s most recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which may be obtained free of charge at the SEC’s website, http://www.sec.gov, and BAT’s Annual Reports, which may be obtained free of charge from BAT’s website www.BAT.com. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof and BAT undertakes no obligation to update or revise publicly any forward-looking statements or other data or statements contained within this communication, whether as a result of new information, future events or otherwise.

No statement in this communication is intended to be a profit forecast and no statement in this communication should be interpreted to mean that earnings per share of BAT or Reynolds for the current or future financial years would necessarily match or exceed the historical published earnings per share of BAT or Reynolds, respectively.

Additional information and where to find it

This communication is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Acquisition. Any solicitation will only be made through materials filed with the SEC. Nonetheless, this communication may be deemed to be solicitation material in respect of the Proposed Acquisition by BAT.

BAT has filed relevant materials with the SEC, including a registration statement on Form F-4 that includes a proxy statement of Reynolds that also constitutes a prospectus of BAT. On 14 June 2017, the SEC declared the registration statement effective. Reynolds commenced mailing the definitive proxy statement/prospectus to holders of Reynolds common stock on or about 14 June 2017. Investors and security holders are urged to read the definitive proxy statement/prospectus, which was also filed with the SEC on 14 June 2017, together with all other relevant documents filed with the SEC, because they contain important information about the Proposed Acquisition. Investors and security holders may obtain the documents free of charge at the SEC’s website, http://www.sec.gov, or for free from BAT using the contact information above.

Participants in solicitation

This communication is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Acquisition. Nonetheless, BAT and its affiliates and each of their directors and executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the holders of Reynolds common stock with respect to the Proposed Acquisition. Information about such parties and a description of their interests are set forth in BAT’s 2016 Annual Report, which may be obtained free of charge from BAT’s website www.BAT.com and Reynolds’s annual report for the year ended 31 December 2016, which was filed on Form 10-K with the SEC on 9 February 2017, Reynolds’s Form 10-K/A, which was filed with the SEC on 20 March 2017 and Reynolds’s definitive


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proxy statement/prospectus, which was filed with the SEC on 14 June 2017 (such filings by Reynolds, collectively, “Reynolds SEC filings”). To the extent holdings of Reynolds securities by such parties have changed since the amounts contained in the Reynolds SEC filings, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interest of such parties is also included in the materials that BAT has filed with the SEC in connection with the Proposed Acquisition. These documents may be obtained free of charge from the SEC’s website http://www.sec.gov, or from BAT using the contact information above.

Non-solicitation

This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

This communication should not be construed as, investment advice and is not intended to form the basis of any investment decision, nor does it form the basis of any contract for acquisition or investment in any member of the BAT group, financial promotion or any offer, invitation or recommendation in relation to any acquisition of, or investment in, any member of the BAT group.

If you are in any doubt about the contents of this announcement or the action you should take, you are recommended to seek your own independent personal financial advice immediately from your stockbroker, bank manager, solicitor, accountant, fund manager or other appropriate independent financial adviser duly authorised under the UK Financial Services and Market Act 2000 (as amended) if you are resident in the United Kingdom or, if not, from another appropriately authorised independent financial adviser.


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THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek your own personal financial advice from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000, as amended (the “FSMA”) if you are resident in the United Kingdom, or, if not, from another appropriately authorised independent financial adviser.

If you have sold or otherwise transferred all of your existing ordinary shares in British American Tobacco p.l.c. (“BAT” or the “Company” and together with its subsidiary undertakings, the “BAT Group”), please send this document, together with the accompanying form of proxy (the “Proxy Form”), Proxy Form – South Africa (“PFSA”) or Voting Instruction Form, as appropriate, (other than documents or forms personalised to you) as soon as possible to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected, for delivery to the purchaser or transferee. However, these documents should not be forwarded, distributed or transmitted in, into or from any jurisdiction where to do so would violate the laws of that jurisdiction. If you have sold or otherwise transferred only part of your holdings of ordinary shares in BAT (the “BAT Shares”) you should retain these documents and contact the bank, stockbroker or other agent through whom the sale or transfer was effected.

This document should be read in conjunction with the prospectus published by BAT in relation to the Proposed Acquisition (as defined below) on or around the date of this document (the “Prospectus”) relating to the new ordinary shares (the “New BAT Shares”) to be issued pursuant to the Proposed Acquisition.

This document is not a prospectus and it does not constitute or form part of any offer or invitation to purchase, acquire, subscribe for, sell, dispose of or issue, or any solicitation of any offer to sell, dispose of, purchase or subscribe for, any securities.

 

 

 

LOGO

BRITISH AMERICAN TOBACCO P.L.C.

(Incorporated and registered in England and Wales under the Companies Act 1985

with registered number 03407696)

Proposed Acquisition of Reynolds American Inc.

and

Notice of General Meeting

 

 

This document should be read as a whole. Your attention is drawn to the risk factors set out on pages 22 to 34 of Part II (Risk Factors) and to the letter from your Chairman which is set out on pages 8 to 21 of Part I (Letter from the Chairman) of this document and which recommends you vote in favour of the resolution to be proposed at the General Meeting referred to below.

Notice of the general meeting of BAT to be held at 2pm on 19 July 2017 at Hilton London Bankside, 2-8 Great Suffolk Street, London SE1 0UG, United Kingdom (the “General Meeting”) is set out at the end of this document (the “Notice of General Meeting”). A Proxy Form, PFSA or Voting Instruction Form, as appropriate, for use at this General Meeting is enclosed. To be valid, the Proxy Form, PFSA or Voting Instruction Form, as appropriate, should be completed, signed and returned in accordance with the instructions printed thereon and Appendix 1 of the Notice of General Meeting. Proxy Forms and PFSAs must be received (1) in the case of a BAT Shareholder on the UK Register by Computershare Investor Services PLC (the “UK Registrar”), at The Pavilions, Bridgwater Road, Bristol BS99 6ZZ, United Kingdom; or (2) in the case of a BAT Shareholder holding certificated BAT Shares on the SA Register by Computershare Investor Services Proprietary Limited (the “SA Registrar”), at Rosebank Towers, 15 Biermann Avenue, Rosebank 2196, (PO Box 61051, Marshalltown 2107), South Africa, as soon as possible but in any event must arrive not later than 48 hours before the time fixed for the start of the meeting.

This document is a circular relating to the Proposed Acquisition which has been prepared in accordance with the Listing Rules.


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Holders of BAT Shares (the “BAT Shareholders”) are advised to read the Prospectus which contains information relating to the BAT Shares. The Prospectus will be available on BAT’s website.

If you have any questions about this document, the General Meeting or the completion and return of the Proxy Form or PFSA, as appropriate, please contact the UK Registrar between 8.30am and 5.30pm (UK Time) Monday to Friday (excluding public holidays) on 0800 408 0094 (from the United Kingdom), or +44 370 889 3159 (from outside the United Kingdom, international rates apply) or the SA Registrar in relation to certificated BAT Shares on the SA Register between 8am and 5pm (South Africa time) Monday to Friday (excluding public holidays) on +27 11 370 5000. Please note that calls may be monitored or recorded and the Registrars cannot provide financial, legal or tax advice on the merits of the Proposed Acquisition.

Centerview Partners UK LLP (“Centerview Partners”) is authorised and regulated by the Financial Conduct Authority (the “FCA”) in the United Kingdom. Centerview Partners is acting as joint financial adviser to the Company and no one else in connection with the Proposed Acquisition and will not be responsible to any person other than the Company for providing the protections afforded to clients of Centerview Partners or for providing advice in relation to the Proposed Acquisition or any other matter referred to in this document.

Deutsche Bank AG is authorised under German Banking Law (competent authority: European Central Bank (the “ECB”)) and in the United Kingdom, by the Prudential Regulatory Authority (the “PRA”). Deutsche Bank AG is subject to the supervision by the ECB and by BaFin, Germany’s Federal Financial Supervisory Authority, and is subject to limited regulation in the United Kingdom by the PRA and the FCA. Deutsche Bank AG, acting through its London Branch (“Deutsche Bank”) is acting as joint financial adviser and joint sponsor to the Company and no one else in connection with the Proposed Acquisition and will not be responsible to any person other than the Company for providing the protections afforded to clients of Deutsche Bank or for providing advice in relation to the Proposed Acquisition or any other matter referred to in this document.

UBS Limited (“UBS”) is authorised by the PRA and regulated by the FCA and the PRA in the United Kingdom. UBS is acting as joint financial adviser and joint sponsor to the Company and no one else in connection with the Proposed Acquisition and will not be responsible to any person other than the Company for providing the protections afforded to clients of UBS or for providing advice in relation to the Proposed Acquisition or any other matter referred to in this document.

Apart from the responsibilities and liabilities, if any, which may be imposed on Centerview Partners, Deutsche Bank or UBS by the FSMA or the regulatory regime established thereunder, or under the regulatory regime of any jurisdiction where the exclusion of liability under the relevant regulatory regime would be illegal, void or unenforceable, Centerview Partners, Deutsche Bank and UBS accept no responsibility whatsoever for, or make any representation or warranty, express or implied, as to the contents of this document, including its accuracy, completeness or for any other statement made or purported to be made by either of them, or on their behalf, in connection with BAT, the BAT Group, the New BAT Shares or the Proposed Acquisition. Centerview Partners, Deutsche Bank and UBS and their subsidiaries, branches and affiliates accordingly disclaim all and any duty, liability and responsibility whether arising in tort, contract or otherwise (save as referred to above) in respect of this document or any such statement or otherwise.

Persons into whose possession this document comes should inform themselves about, and observe, any applicable restrictions and legal, exchange control or regulatory requirements in relation to the distribution of this document and the Proposed Acquisition. Any failure to comply with such restrictions or requirements may constitute a violation of the securities laws of any such jurisdiction. The contents of this document should not be construed as legal, business or tax advice.

Notice to overseas shareholders

The release, publication or distribution of this document in certain jurisdictions may be restricted by law. Persons who are not resident in the United Kingdom or who are subject to other jurisdictions should inform themselves of, and should observe, any applicable requirements. Any failure to comply with these requirements may constitute a violation of the securities laws of any such jurisdiction. To the fullest extent permitted by applicable law, the companies and persons involved in the Proposed Acquisition disclaim any responsibility or liability for the violation of such requirements by any person.

 

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NOTICE TO US SHAREHOLDERS

Additional information and where to find it

This document is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that have been and may be made with the United States Securities and Exchange Commission (the “SEC”) in connection with the Proposed Acquisition. Nonetheless, BAT, and its affiliates and each of their directors and executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the holders of Reynolds American Inc. (“RAI”) common stock with respect to the Proposed Acquisition.

Information about certain of such parties and a description of their interests are set forth in BAT’s annual report for the year ended 31 December 2016, which may be obtained free of charge from BAT’s website www.bat.com and RAI’s annual report for the year ended 31 December 2016, which was filed on Form 10-K with the SEC on 9 February 2017, RAI’s Form 10-K/A, which was filed with the SEC on 20 March 2017 and RAI’s definitive proxy statement/prospectus, which was filed with the SEC on 14 June 2017 (such filings by RAI, collectively, “RAI SEC filings”). To the extent holdings of RAI securities by certain of such parties have changed since the amounts contained in the RAI SEC filings, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interest of such parties will also be included in the materials that BAT intends to file with the SEC in connection with the Proposed Acquisition. These documents (if and when available) may be obtained free of charge from the SEC’s website http://www.sec.gov, or from BAT using the contact information above.

In connection with the Proposed Acquisition, BAT has filed relevant materials with the SEC, including a Registration Statement on Form F-4 (the “Registration Statement”) with the SEC that includes a proxy statement of RAI that also constitutes a prospectus of BAT. On 14 June 2017, the SEC declared the Registration Statement effective. RAI commenced mailing the definitive proxy statement/prospectus to holders of RAI common stock on or about 14 June 2017. Investors and security holders are urged to read the definitive proxy statement/prospectus, which was also filed with the SEC on 14 June 2017, together with all other relevant documents filed with the SEC, because they contain important information about the Proposed Acquisition. Investors and security holders may obtain the documents free of charge at the SEC’s website, http://www.sec.gov, or for free from BAT at batir@bat.com or +44 (0) 20 7845 1000.

This document is not a substitute for the Registration Statement or other documents that BAT may file with the SEC in connection with the Proposed Acquisition. INVESTORS AND SECURITY HOLDERS OF RAI ARE URGED TO READ CAREFULLY THE REGISTRATION STATEMENT AND ANY OTHER DOCUMENTS FILED WITH THE SEC BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT BAT, RAI AND THE PROPOSED ACQUISITION.

Non-solicitation

This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities under the United States federal securities laws, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of section 10 of the Securities Act of 1933, as amended.

This document is dated 14 June 2017.

 

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CONTENTS

 

          Page  

EXPECTED TIMETABLE OF EVENTS AND INDICATIVE MERGER STATISTICS

     1  

PRESENTATION OF INFORMATION

     2  

DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS

     6  

PART I

   LETTER FROM THE CHAIRMAN      8  

PART II

   RISK FACTORS      22  

PART III

   HISTORICAL FINANCIAL INFORMATION OF THE RAI GROUP      35  

PART IV

   UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE COMBINED GROUP      52  

PART V

   SUMMARY OF THE PRINCIPAL TERMS AND CONDITIONS OF THE MERGER AGREEMENT      65  

PART VI

   ADDITIONAL INFORMATION      68  

PART VII

   DEFINITIONS      72  

APPENDIX 1 PROFIT FORECAST

     79  

APPENDIX 2 LORILLARD’S FINANCIAL STATEMENTS

     96  

NOTICE OF GENERAL MEETING

     145  

 

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EXPECTED TIMETABLE OF EVENTS AND INDICATIVE MERGER STATISTICS

Timetable

All references to time in this document and in the expected timetable are to the time in London, United Kingdom, unless otherwise stated. Each of the times and dates in the table below are indicative only and may be subject to change.

 

Event

  

Time and Date

Announcement of the Proposed Acquisition

   17 January 2017

Publication of the Prospectus

   14 June 2017

Publication of the Circular

   14 June 2017
Latest time and date for receipt of Proxy Forms and PFSAs    2pm (UK time) / 3pm (South Africa time) on 17 July 2017

Voting record date (UK and South Africa)

   6pm (UK time) / 7pm (South Africa time) on 17 July 2017

General Meeting to approve the Proposed Acquisition

   2pm (UK time) 19 July 2017

RAI Special Meeting to approve the Proposed Acquisition

   9am (New York time) on 19 July 2017

Expected date of Completion

   25 July 2017

Expected date New BAT Shares issued and credited to CREST

   25 July 2017
Expected date of admission and commencement of dealings in New BAT ADSs on the NYSE and conversion of Existing BAT ADSs    25 July 2017
Expected date of Admission and commencement of dealings in New BAT Shares on the LSE and the JSE    26 July 2017

Merger Statistics

 

Number of Existing BAT Shares1

  

2,027,103,642

Number of New BAT Shares to be issued pursuant to the Proposed Acquisition    up to 435,556,670
Number of BAT Shares in issue immediately following Admission1,2,3    up to 2,462,660,312
New BAT Shares as a percentage of the total BAT Shares immediately following Admission1,2,3    17.69%

ISIN

   B0002875804

SEDOL

   0287580

 

1 Number of BAT Shares as at the Latest Practicable Date (including treasury shares in BAT (“BAT Treasury Shares”) and shares owned by employee share trusts). There are 162,645,590 BAT Treasury Shares, representing 8.72% of BAT’s share capital excluding BAT Treasury Shares, as at the Latest Practicable Date.

 

2 Assumes that no new BAT Shares are issued as a result of (1) the exercise of any options or (2) awards vesting under the BAT Employee Share Schemes between the Latest Practicable Date and Admission.

 

3 Based on the number of BAT Shares in issue as at the Latest Practicable Date and that 435,556,670 New BAT Shares are issued in connection with the Proposed Acquisition.

 

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PRESENTATION OF INFORMATION

 

1. Forward-looking statements

Certain statements in this document regarding the Proposed Acquisition, the expected timetable for completing the Proposed Acquisition, the benefits and synergies of the Proposed Acquisition, future opportunities for the BAT Group and the RAI Group after the Proposed Acquisition has taken effect (the “Combined Group”) and any other statements regarding the BAT Group’s, the RAI Group’s or the Combined Group’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts are “forward-looking” statements made within the meaning of section 21E of the Exchange Act. These statements are often, but not always, made through the use of words or phrases such as “believe”, “anticipate”, “could”, “may”, “would”, “should”, “intend”, “plan”, “potential”, “predict”, “will”, “expect”, “estimate”, “project”, “positioned”, “strategy”, “outlook” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or statistical data within this document. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: whether the conditions to the Proposed Acquisition will be satisfied and the Proposed Acquisition will be completed on the anticipated timeframe, or at all; the failure to realise contemplated synergies and other benefits from the Proposed Acquisition; the incurrence of significant costs and the availability and cost of financing in connection with the Proposed Acquisition; the effect of the announcement of the Proposed Acquisition, and related uncertainties as to whether the Proposed Acquisition will be completed, on the BAT Group’s, the RAI Group’s or the Combined Group’s ability to retain customers, retain and hire key personnel and maintain relationships with suppliers and on their operating results and businesses generally; the ability to maintain credit ratings; changes in the tobacco industry and stock market trading conditions; changes or differences in domestic or international economic or political conditions; changes in tax laws and rates; the impact of adverse legislation and regulation; the ability to develop, produce or market new alternative products profitably; the ability to effectively implement strategic initiatives and actions taken to increase sales growth; the ability to enhance cash generation and pay dividends; adverse litigation and dispute outcomes; and changes in the market position, businesses, financial condition, results of operations or prospects of the BAT Group, the RAI Group or the Combined Group.

Important factors which may cause actual results to differ include, but are not limited to, those described in Part II (Risk Factors) of this Circular.

Forward-looking statements contained in this document speak only as at the date of this document. Each of the Company, the Directors, Centerview Partners, Deutsche Bank and UBS expressly disclaims any obligation or undertaking to publicly update any forward-looking statements or other data or statements contained in this document, whether as a result of new information, future or changes in events or otherwise, other than as required by law, regulation, the Prospectus Rules, the Listing Rules or the Disclosure Guidance and Transparency Rules of the FCA. Accordingly, prospective investors are cautioned not to place undue reliance on any of the forward-looking statements herein.

 

2. Market and industry data

Certain information in this document has been sourced from third parties. Save as set out below, where information in this document has been sourced from third parties, the source of such information has been clearly stated adjacent to the reproduced information.

All information contained in this document which has been sourced from third parties has been accurately reproduced and, as far as the Company is aware and is able to ascertain from information published by the relevant third party, no facts have been omitted which would render the reproduced information inaccurate or misleading.

All references to market data, industry statistics and forecasts and other information in this document consist of estimates based on data and reports compiled by industry professionals, organisations, analysts, publicly available information or the Company’s own knowledge of its sales and markets.

References to market share are the BAT Group’s estimates based on the latest available data from a number of internal and external sources.

 

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US industry shipment volume and retail share of market data that appear in this Circular have been obtained from MSAi. This information is included in this Circular because it is used primarily as an indicator of the relative performance of industry participants, brands and market trends. All US market share results that appear, except as noted otherwise, in this document are based on US cigarette (or smokeless tobacco products, as applicable) shipments to retail outlets (“STR Data”), based on information submitted by wholesale locations and processed and managed by MSAi. However, investors should not rely on the STR Data reported by MSAi as being a precise measurement of actual market share as the shipments to retail outlets do not reflect actual consumer sales and do not track all volume and trade channels. Accordingly, the STR Data of the US tobacco industry as reported by MSAi may overstate or understate actual market share. Moreover, investors should be aware that in a product market experiencing overall declining consumption, a particular product can experience increasing market share relative to competing products, yet still be subject to declining consumption volumes.

Market data and statistics are inherently speculative and are not necessarily reflective of actual market conditions. Such statistics are based on market research, which itself is based on sampling and subjective judgments by both the researchers and the respondents, including judgments about what types of products and transactions should be included in the relevant market. In addition, the value of comparisons of statistics for different markets is limited by many factors, including that (i) the markets may be defined differently, (ii) the underlying information may be gathered by different methods and (iii) different assumptions may be applied in compiling the data. Accordingly, the market statistics included in this document should be viewed with caution and no representation or warranty is given by any person as to their accuracy.

When used in describing aspects of the BAT Group’s business, reference to volume is an unaudited operating measure and is calculated as the total global cigarette volume of the BAT Group’s brands sold by its subsidiaries.

References to the price of the BAT ADSs prior to 14 February 2017 are adjusted to give effect to the BAT ADS ratio change unless otherwise indicated.

 

3. Sources and presentation of financial information

 

3.1 Presentation of RAI financial information

The historical financial information relating to the RAI Group, including that which is incorporated by reference into Section A of Part III (Historical Financial Information of the RAI Group) of this document, has been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”).

Section B of Part III of this document includes unaudited reconciliations of the RAI Group’s historical financial information from US GAAP to International Financial Reporting Standards as adopted by the European Union (“IFRS (EU)”).

The RAI Group completed the Lorillard Merger (as described in paragraph 2.1 of Part VIII (Information on the RAI Group) of the Prospectus) in June 2015. Section C of Part III of this document incorporates by reference historical financial information of the Lorillard Group for the year ended 31 December 2014 and includes historical financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015, presented in accordance with US GAAP. Section D of Part III of this document includes unaudited reconciliations of the Lorillard Group’s historical financial information for the year ended 31 December 2014 and for the period from 1 January 2015 to 11 June 2015 from US GAAP to IFRS (EU).

 

3.2 Combined Group Financial Information

Following Completion, RAI will be a subsidiary within the BAT Group, and the accounting policies applied to the RAI Group will be the same as those applied to the BAT Group.

 

4. Unaudited supplementary non-IFRS (EU) measures of the BAT Group’s performance

This document contains certain unaudited supplementary measures that are not required by, or presented in accordance with, IFRS (EU) or other generally accepted accounting principles. These measures are used by the BAT Group to assess the financial performance of its businesses. These measures include, among others, adjusted profit from operations, adjusted diluted earnings per share, constant exchange rate analysis, free cash flow, net debt and an underlying tax rate and are included because the Directors believe that they are important supplemental measures of operating

 

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performance. The Directors believe that the non-IFRS (EU) measures used provide investors with a means of evaluating, and an understanding of how the BAT Group evaluates its performance and results on a comparable basis that is not otherwise apparent on an IFRS (EU) basis, since many non-recurring, infrequent or non-cash items that the Directors believe not to be indicative of the core performance of the business may not be excluded when preparing financial measures under IFRS (EU).

The unaudited supplementary non-IFRS (EU) measures contained in this document should not be considered in isolation from, or as a substitute for, measures presented in accordance with IFRS (EU). In addition, the unaudited supplementary non-IFRS (EU) measures presented by the BAT Group may not be comparable to similarly titled measures presented by other businesses, as such businesses may define and calculate such measures differently than the BAT Group. Accordingly, undue reliance should not be placed on the unaudited supplementary non-IFRS (EU) measures contained in this document.

 

4.1 Non-IFRS (EU) financial measures used by the BAT Group

 

4.1.1 Adjusted profit from operations

To supplement the BAT Group’s results from operations presented in accordance with IFRS (EU), the Directors review current and prior year adjusted profit from operations to evaluate the performance of the BAT Group and its geographic segments and to allocate resources to the overall business. Adjusted profit from operations is not a measure defined by IFRS (EU). The BAT Group’s most directly comparable IFRS (EU) measure to adjusted profit from operations is profit from operations. Adjusted profit from operations is defined as profit from operations before adjusting items in profit from operations. Adjusting items, as identified in accordance with the BAT Group’s accounting policies, represent certain items of income and expense which the BAT Group considers distinctive based on their size, nature or incidence. In identifying and quantifying adjusting items, the BAT Group consistently applies a policy that defines criteria that are required to be met for an item to be classified as adjusting and provides details of items that are specifically excluded from being classified as adjusting items. Adjusting items in profit from operations include restructuring and integration costs, amortisation of trademarks and similar intangibles, a gain on deemed partial disposal of a trademark, and a payment and release of a provision relating to non-tobacco litigation.

 

4.1.2 Constant exchange rate analysis

Movements in foreign exchange rates have impacted the BAT Group’s profit from operations. The Directors review certain of its results, including revenue and adjusted profit from operations, at constant rates of exchange. The BAT Group calculates these financial measures at constant rates of exchange based on a retranslation, at prior year exchange rates, of the current year results of the BAT Group and its segments. The BAT Group does not adjust for the normal transactional gains and losses in operations that are generated by exchange movements. Although the Directors do not believe that these measures are a substitute for IFRS (EU) measures, the Directors believe that such results excluding the impact of currency fluctuations year-on-year provide additional useful information to investors regarding the operating performance on a local currency basis.

 

4.1.3 Free cash flow

The BAT Group uses free cash flow to illustrate the cash flows before transactions relating to borrowings. Free cash flow is not a measure defined by IFRS (EU). The BAT Group defines free cash flow as net cash generated from operating activities adjusted for dividends paid to non-controlling interests, net interest paid, net capital expenditure (offset by sales of assets in the period) and proceeds from associates’ share buy-backs. The most directly comparable IFRS (EU) measure to free cash flow is net cash generated from operating activities. The Directors believe that this additional measure, which is used internally, is useful to the users of the financial statements in helping them understand the underlying business performance and can provide insight into the cash flow available to, among other things, reduce debt and pay dividends. Free cash flow has limitations as an analytical tool. It is not a presentation made in accordance with IFRS (EU) and should not be considered as an alternative to net cash generated from operating activities determined in accordance with IFRS (EU). Free cash flow is not necessarily comparable to similarly titled measures used by other companies. As a result, investors should not consider this measure in isolation from, or as a substitute analysis for, the BAT Group’s results of operations or cash flows as determined in accordance with IFRS (EU).

 

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4.1.4 Net debt

The BAT Group uses net debt to assess its financial capacity. Net debt is not a measure defined by IFRS (EU). The most directly comparable IFRS (EU) measure to net debt is total borrowings. The BAT Group defines net debt as total borrowings, including related derivatives, less cash and cash equivalents and current available-for-sale investments. The Directors believe that this additional measure, which is used internally, is useful to the users of the financial statements in helping them to see how business financing has changed over the year. Net debt has limitations as an analytical tool. It is not a presentation made in accordance with IFRS (EU), and should not be considered as an alternative to borrowings or total liabilities determined in accordance with IFRS (EU). Net debt is not necessarily comparable to similarly titled measures used by other companies. As a result, investors should not consider this measure in isolation from, or as a substitute analysis for, the BAT Group’s measures of financial position or liquidity as determined in accordance with IFRS (EU).

 

4.1.5 Underlying tax rate

The tax rates in the Income Statement are affected by the inclusion of the shares of associates’ post-tax profit in the BAT Group’s pre-tax results and by adjusting items. The underlying tax rate for subsidiaries excludes these items.

 

5. Pro forma financial information

In this document, any reference to “pro forma” financial information is to information which has been extracted without material adjustment from the unaudited financial information contained in Part IV (Unaudited Pro Forma Financial Information of the Combined Group) of this document.

The Unaudited Pro Forma Financial Information (as defined below) is for illustrative purposes only. Because of its nature, the pro forma financial information addresses a hypothetical situation and, therefore, does not represent the actual financial position or results of the BAT Group, the RAI Group or the Combined Group.

Future results of operations may differ materially from those presented in the Unaudited Pro Forma Information due to various factors.

 

6. Rounding

Certain financial data and percentages have been rounded. As a result of such rounding, the totals of financial data presented in this document may vary slightly from the actual arithmetic totals of such data and percentages in tables may not add up to 100%.

 

7. Currency

The BAT Group prepares its financial statements in pound sterling. All references to “pound”, “pounds”, “pound sterling”, “sterling”, “£”, “pence” and “p” are to the lawful currency of the United Kingdom.

The RAI Group prepares its financial statements in US dollars. All references to “US dollar”, “dollar”, “$”, “US$” and “cents” are to the lawful currency of the United States.

All references to “CAD dollars” and “CAD$” are to the lawful currency of Canada.

 

8. No profit forecast or estimates

Unless otherwise stated, no statement in this document is intended as a profit forecast or estimate for any period and no statement in this document should be interpreted to mean that earnings or earnings per share (“EPS”) for BAT or RAI, as appropriate, for the current or future financial years would necessarily match or exceed the historical published earnings or EPS for BAT or RAI, as appropriate.

 

9. Incorporation by reference

Certain information in relation to the BAT Group is incorporated by reference in this document, as set out in paragraph 3 of Part VI (Additional Information).

The contents of BAT’s and RAI’s websites or any hyperlinks accessible from those websites do not form part of this document and investors should not rely on them.

 

10. Definitions

Certain terms used in this document, including capitalised terms and certain technical terms, are defined and explained in Part VII (Definitions) of this document.

 

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DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS

 

Directors     

Richard Burrows

   Chairman

Nicandro Durante

   Chief Executive

Ben Stevens

   Finance Director

Kieran Poynter

   Senior Independent Director

Sue Farr

   Non-Executive Director

Ann Godbehere

   Non-Executive Director

Dr Marion Helmes

   Non-Executive Director

Savio Kwan

   Non-Executive Director

Dr Pedro Malan

   Non-Executive Director

Dimitri Panayotopoulos

   Non-Executive Director

Company secretary

Paul McCrory

Registered and head office of the Company (including following Completion)

British American Tobacco p.l.c.

Globe House

4 Temple Place

London

WC2R 2PG

United Kingdom

Joint Sponsor and Joint Financial Adviser

Deutsche Bank AG, London Branch

Winchester House

1 Great Winchester Street

London EC2N 2DB

United Kingdom

Joint Sponsor and Joint Financial Adviser

UBS Limited

5 Broadgate

London EC2M 2QS

United Kingdom

Joint Financial Adviser

Centerview Partners UK LLP

100 Pall Mall

St. James’s

London SW1Y 5NQ

United Kingdom

SA Transaction Sponsors

UBS South Africa (Pty) Ltd

64 Wierda Road East

Wierda Valley

Sandton 2196

South Africa

 

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Legal advisers to the Company as to English law

Herbert Smith Freehills LLP

Exchange House

Primrose Street

London EC2A 2EG

United Kingdom

Legal advisers to the Company as to US law

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, NY 10019

United States

Legal advisers to the Company as to South African law

Werksmans Attorneys

155 5th Street

Sandton

Johannesburg 2196

South Africa

Legal advisers to the Joint Sponsors and Joint Financial Advisers as to English and US law

Davis Polk & Wardwell London LLP

5 Aldermanbury Square

London EC2V 7HR

United Kingdom

Auditors and Reporting Accountants

KPMG LLP

15 Canada Square

Canary Wharf

London E14 5GL

United Kingdom

UK Registrar and Receiving Agent

Computershare Investor Services PLC

The Pavilions

Bridgwater Road

Bristol

BS99 6ZZ

United Kingdom

SA Registrar and Receiving Agent

Computershare Investor Services Proprietary Limited

Rosebank Towers

15 Biermann Avenue

Rosebank 2196

(PO Box 61051, Marshalltown 2107)

South Africa

 

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LOGO

(Incorporated and registered in England and Wales with company number 03407696)

PART I

LETTER FROM THE CHAIRMAN

Registered Office:

Globe House

4 Temple Place

London WC2R 2PG

United Kingdom

Tel: +44 (0)20 7845 1000

Fax: +44 (0)20 7240 0555

www.bat.com

Directors:

Richard Burrows (Chairman)

Nicandro Durante (Chief Executive)

Ben Stevens (Finance Director)

Kieran Poynter (Senior Independent Director)

Sue Farr (Non-Executive Director)

Ann Godbehere (Non-Executive Director)

Dr Marion Helmes (Non-Executive Director)

Savio Kwan (Non-Executive Director)

Dr Pedro Malan (Non-Executive Director)

Dimitri Panayotopoulos (Non-Executive Director)

14 June 2017

To the BAT Shareholders and, for information only, to persons with information rights

Dear Shareholder

Proposed Acquisition of Reynolds American Inc.

and

Notice of General Meeting

 

1. Introduction

On 17 January 2017, BAT announced that it and RAI had agreed the terms of a recommended offer for the acquisition, by a subsidiary of BAT, of the remaining 57.8% of the common stock of RAI (the “RAI Shares”), not already held by the BAT Group, which will be effected through a statutory merger pursuant to the laws of North Carolina (the “Proposed Acquisition”).

Under the terms of the Proposed Acquisition, the RAI Shareholders, subject to certain conditions, will receive $29.44 in cash and 0.5260 of a New BAT Share, which will be represented by BAT American Depositary Shares (each a “New BAT ADS”) listed on the New York Stock Exchange (the “NYSE”), for each of their RAI Shares.

 

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Owing to its size, the Proposed Acquisition constitutes a class 1 transaction for the purposes of the Listing Rules, and therefore requires the approval of BAT Shareholders. The Proposed Acquisition is conditional on, amongst other things, such approval being obtained. Accordingly, a General Meeting has been convened for 2pm on 19 July 2017 at Hilton London Bankside, 2-8 Great Suffolk Street, London SE1 0UG, United Kingdom. The Notice of General Meeting is set out at the end of this document and an explanation of the Resolution to be proposed is set out in paragraph 15.2 of this Part I (Letter from the Chairman).

RAI was incorporated in the state of North Carolina and RAI Shares are listed on the NYSE. RAI is therefore not subject to the Listing Rules. However, pursuant to the terms of the Merger Agreement, and in accordance with the North Carolina Business Corporation Act (the “NCBCA”) the Proposed Acquisition is also conditional on RAI Shareholder approvals. For further details of the shareholder approvals required, please see paragraph 10.3 of this Part I (Letter from the Chairman).

In connection with the Proposed Acquisition, the Company has also issued the Prospectus, which has been filed with the FCA and made available to the public in accordance with Rule 3.2 of the Prospectus Rules.

The purpose of this letter is to give you further details of the Proposed Acquisition, including the background and reasons for it and to explain why the board of Directors of BAT (the “Board”) considers it to be in the best interests of BAT and BAT Shareholders as a whole and unanimously recommends that BAT Shareholders vote in favour of the Resolution set out in the Notice of General Meeting.

 

2. Summary of the terms of the Proposed Acquisition

Pursuant to the terms of the Merger Agreement, subject to the satisfaction of the conditions to completion of the Proposed Acquisition as set out in the Merger Agreement (the “Conditions”), RAI Shareholders, other than the BAT Group and RAI Shareholders who have properly asserted and not lost or effectively withdrawn a demand for appraisal rights, will receive:

For each RAI Share:

$29.44 in cash

and

0.5260 of a New BAT Share which

shall be represented by New BAT ADSs listed on the NYSE

 

  ·   Based on BAT’s share price and the pound sterling-US dollar exchange rate as at market close on 12 June 2017 (the “Latest Practicable Date”), the purchase price implies a total current value of $54.5 billion for the remaining 57.8% of RAI Shares not owned by the BAT Group, comprised of approximately $24.4 billion in cash and $30.1 billion in New BAT Shares which will be represented by New BAT ADSs.

 

  ·   Based on BAT’s share price and the pound sterling-US dollar exchange rate as at market close on the Latest Practicable Date, this represents a premium of 39.5% over the closing price of RAI Shares on 20 October 2016 (being the last day prior to BAT’s announcement on 21 October 2016 of a proposal to merge with RAI).

As with the Existing BAT ADSs, each New BAT ADS will represent one underlying BAT Share. BAT intends to register the New BAT ADSs and the New BAT Shares with the SEC. No fractional New BAT ADSs will be issued in respect of the Proposed Acquisition and RAI Shareholders will receive cash in lieu of any fractional New BAT ADS (based on the net cash proceeds from the sale by the Exchange Agent of the aggregated New BAT ADSs).

BAT currently intends to finance the cash portion of the Merger Consideration, which the Directors estimate to be approximately $24.4 billion, and related fees and expenses, with drawings under the Acquisition Facility (as defined below). A $25 billion Acquisition Facility has been entered into with a syndicate of banks to provide financing certainty. The Directors currently expect that the utilised Acquisition Facility will be refinanced by bond issuances in due course. For further details of the debt financing arrangements, please see paragraphs 11 and 12 of this Part I (Letter from the Chairman).

The Proposed Acquisition will take place by way of a statutory merger under the laws of North Carolina, pursuant to which Flight Acquisition Corporation (“Merger Sub”), a North Carolina corporation and an indirect wholly owned subsidiary of BAT, will merge with and into RAI, with RAI surviving the merger as an indirect wholly owned subsidiary of BAT.

 

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The expected timetable of principal events for the Proposed Acquisition is set out on page 1 of this document. Subject to the satisfaction or waiver of the Conditions, completion of the Proposed Acquisition (“Completion”) is expected to occur on or around 25 July 2017.

Following Completion and assuming that 435,556,670 New BAT Shares are issued in connection with the Proposed Acquisition, the RAI Shareholders will, together, own approximately 19% of the ordinary share capital of the Combined Group (excluding BAT Treasury Shares). RAI will become an indirect, wholly-owned subsidiary of BAT.

 

3. Background to, and reasons for, the Proposed Acquisition

The BAT Group has been a shareholder of RAI since July 2004. In July 2004, the US assets, liabilities and operations, other than certain specified assets and liabilities, of BAT’s wholly owned subsidiary, Brown & Williamson Holdings, Inc. (“B&W”), then known as Brown & Williamson Tobacco Corporation, were combined with R. J. Reynolds Tobacco Company (“RJR Tobacco Company”). RAI previously was formed as a new holding company for these combined businesses. As a result of this business combination, BAT acquired beneficial ownership of approximately 42% of outstanding RAI Shares.

The Board believes that the Proposed Acquisition represents the logical progression in BAT’s relationship with RAI and offers shareholders of both companies a stake in a stronger, global tobacco and Next Generation Products company.

Enhanced geographic coverage:

The Combined Group will have enhanced geographic coverage across emerging and developed markets as a result of the Proposed Acquisition.

The BAT Group has a significant presence in emerging markets across South America, Africa, the Middle East and Asia. Over the last five years, revenue per pack in these markets has grown at more than twice the rate compared to developed markets. With generally low cigarette pack prices and expectations of continued growth in consumer disposable income over the long term, the future profit growth opportunity remains strong.

While the United States is characterised as a developed market, direct access to the US market strengthens BAT’s opportunity for long-term profitable growth. The United States is the world’s largest tobacco profit pool (excluding China), and over the last five years has grown revenue per pack at a faster rate than other developed markets. Long-term growth prospects are underpinned by affordable pack prices, relatively high disposable incomes and a growing market for Next Generation Products.

The Board believes that, after Completion, the Combined Group will be a larger, broader, more geographically diversified business with continued exposure to high growth emerging markets, direct access to the opportunity in the US market and a broad presence in key developed markets.

Combined portfolio of global brands:

The Combined Group will benefit from the combined portfolio of strong, growing global brands of both the BAT Group and the RAI Group, bringing together ownership of NEWPORT, KENT and PALL MALL, and in particular, that the unified ownership of these brands will allow the BAT Group to leverage consistent global positioning and shared resources. The RAI Group is well positioned with the second largest cigarette market share in the US market, with three out of the four top selling cigarette brands and the benefits from the Lorillard Merger already evident. For the year ended 31 December 2016, the RAI Group accounted for approximately 34% of the US cigarette market share, with NEWPORT the leading brand in menthol, PALL MALL the leading value brand and the NATURAL AMERICAN SPIRIT brand, which is a top ten best-selling cigarette brand in the United States. For the year ended 31 December 2016, American Snuff Co., an RAI subsidiary, also had a 33% share of the US moist snuff category, led by its GRIZZLY brand. US moist snuff retail volumes grew approximately 3.6% in 2016.

Global Next Generation Products business:

The Combined Group will be a global company in the fast growing Next Generation Product category, with an opportunity to leverage scale and insights across the largest and fastest growing markets and categories for Next Generation Products. The BAT Group is one of the largest international companies in the vapour market outside of the United States and China, having successfully launched a portfolio of products in the five largest vapour markets in Europe and established significant market share in the

 

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United Kingdom and Poland, based on the BAT Group’s internal estimates. In December 2016, GLO, an innovative tobacco heating product, was launched in Japan with encouraging early results. In addition, the RAI Group’s VUSE is one of the leading vapour brands sold in the US vapour retail market. The Proposed Acquisition will benefit from the best of the two companies’ talented research and development and next generation product organisations, including nicotine replacement therapy, and allow such next generation product capabilities to be shared more broadly. In particular, the Board believes that the Proposed Acquisition will increase BAT’s exposure to the US vapour market and, subject to applicable approvals from the US Food and Drug Administration (the “FDA”) and compliance with other US rules, may permit further leverage of the BAT Group’s pipeline of Next Generation Products.

Growth prospects:

The BAT Group has a successful track record of developing strong brands and growing market share through a consistent focus on consumer insights, product quality and innovation, enabling it to build on RAI’s existing share growth momentum. The global drive brand portfolio of DUNHILL, KENT, LUCKY STRIKE, PALL MALL and ROTHMANS has grown volume at an average of 7% per annum over the last three years, gaining more than 200 basis points share over the period. The Board believes that the ownership of RAI and access to the US market will further support BAT’s commitment to long-term profitable growth through consistent revenue growth. Further, the Board believes that the Proposed Acquisition will give BAT ownership of what will be a significant proportion of the Combined Group’s cash flows and provide a more balanced exposure to foreign exchange.

 

4. Synergies and integration

The Board anticipates realising at least $400 million in annualised cost synergies by the end of the third full year following Completion. These synergies are expected to be primarily achieved by leveraging the scale of the Combined Group, integrating corporate functions and eliminating redundant spending using BAT’s target operating model principles and policies and delivering other efficiencies in manufacturing and supply chain.

The Board expects cost synergies to be achieved in the following main areas, listed in order of the magnitude of expected impact on the Combined Group:

 

  ·   integration of corporate functions and elimination of duplicated spend using BAT’s target operating model principles and policies;

 

  ·   procurement savings from leveraging enhanced scale, global expertise and category management;

 

  ·   integration of product development capabilities using a “best of both” approach; and

 

  ·   other efficiencies in manufacturing and supply chain.

The one-off costs of delivering these synergies are expected to total approximately $325 million to $350 million. The Board confirms that the annual cost synergies and the anticipated one-off expenditure reflect both the beneficial elements and the relevant costs of achieving these synergies.

These expected synergies have been calculated based on BAT and RAI’s financial and management information for the year ended 31 December 2016. The synergies referred to above are expected to be recurring and will accrue as a direct result of the Proposed Acquisition and would not be achievable independently. The Board believes that there are no material dis-synergies which would arise in connection with the Proposed Acquisition that will impact the planned benefits.

Although the Board expects that cost savings will result from the Proposed Acquisition from 2018 onwards, increasing to the full annualised amount of at least $400 million by the end of the third full year following Completion, there can be no assurance that any particular amount of such savings or synergies will be achieved following Completion or that they will be achieved in the expected time frame.

The Board expects that the Proposed Acquisition will be accretive to adjusted diluted earnings per share (“EPS”) in the first full year of ownership and beyond.

The Board is confident that the integration of RAI can be achieved without causing any material disruption to the underlying operations of the two businesses. As at the date of this document, appropriate preparatory integration planning is being undertaken by an integration leadership team

 

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comprising members of senior management of both the BAT Group and the RAI Group. Individual work-streams have been defined with nominated leads from the BAT Group and the RAI Group to feed in to an overall integration plan that will manage the key synergy related activities until the benefits are realised. The plan is expected to be produced in July 2017 and will cover the following key components:

 

  ·   the overall approach, plus detailed activities for the first six months post-Completion;

 

  ·   the plans to develop and implement the destination operating model and associated organisational design for each of the RAI Group’s corporate functions operating within the BAT Group;

 

  ·   the integration of key IT systems;

 

  ·   an agreed communication strategy; and

 

  ·   the adoption of all necessary monitoring and tracking mechanisms designed to ensure the synergies are realised.

The cost synergies estimated by the Board, as described above, were taken into consideration by RAI in projecting certain cost synergies of $500 million as a result of the Proposed Acquisition. These estimated cost synergies and certain estimated annual tax efficiencies were used by the financial adviser to the RAI Transaction Committee, Goldman Sachs, and the financial advisers to the RAI board of directors, J.P. Morgan and Lazard, in their own respective manner in performing their respective financial analyses and used by the RAI Transaction Committee and the RAI board of directors for purposes of their consideration and evaluation of the Proposed Acquisition and have been disclosed in the Proxy Statement/Prospectus forming part of BAT’s Registration Statement on Form F-4 and the filings on Schedule 13E-3 in relation to RAI (the “Schedules 13E-3”), which have been filed with the SEC.

The RAI estimates relating to the cost synergies and the annual tax efficiencies were used in the financial advisers’ analyses which were disclosed publicly to meet disclosure requirements under the applicable rules and regulations promulgated by the SEC, and are therefore included in the Form F-4 and in exhibits to the Schedules 13E-3. As mentioned above, the Board’s estimate of annualised cost synergies by the end of the third full year following Completion is at least $400 million.

 

5. Summary information on RAI

RAI, the parent company of the RAI Group, is a holding company whose wholly owned operating subsidiaries include the second largest tobacco company in the United States, RJR Tobacco Company; Santa Fe Natural Tobacco Company, Inc. (“SFNTC”), the manufacturer and marketer of the NATURAL AMERICAN SPIRIT brand of cigarettes and other tobacco products in the United States; the second largest smokeless tobacco products manufacturer in the United States, American Snuff Company, LLC (“American Snuff Co.”); R. J. Reynolds Vapor Company (“RJR Vapor”), a marketer of digital vapour cigarettes in the United States; Niconovum USA, Inc. and Niconovum AB, marketers of nicotine replacement therapy products in the United States and Sweden, respectively; and until their sale on 13 January 2016, SFRTI, and various foreign subsidiaries affiliated with SFR Tobacco International GmbH (“SFRTI”), distributors and marketers of NATURAL AMERICAN SPIRIT brand of cigarettes and other tobacco products outside the United States.

RAI’s reportable operating segments are the RJR Tobacco segment, the Santa Fe segment and the American Snuff segment:

 

  ·   The RJR Tobacco segment consists of the primary operations of RJR Tobacco Company and includes three of the top four best-selling cigarettes in the United States: NEWPORT, CAMEL and PALL MALL. These brands, and RJR Tobacco’s other brands, including DORAL, MISTY and CAPRI, are manufactured in a variety of styles and marketed in the United States. As part of its total tobacco strategy, RJR Tobacco offers a smokeless tobacco product, CAMEL Snus. RJR Tobacco manages contract manufacturing of cigarettes and tobacco products through arrangements with the BAT Group, and manages the export of tobacco products to US territories, US duty-free shops and US overseas military bases. In the United States, RJR Tobacco also manages the premium cigarette brands DUNHILL, which RJR Tobacco Company licenses from the BAT Group, and STATE EXPRESS 555, which RJR Tobacco Company licenses from CTBAT International Co. Limited (“CTBAT”), a joint venture between the BAT Group and China National Tobacco Corporation (“CNTC”).

 

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  ·   The Santa Fe segment consists of the primary operations of SFNTC and includes the manufacturing and marketing of premium cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand in the United States.

 

  ·   The American Snuff segment consists of the primary operations of American Snuff Co.. American Snuff is the second largest smokeless tobacco products manufacturer in the United States, and offers adult tobacco consumers a range of differentiated smokeless tobacco products, primarily moist snuff. The moist snuff category is divided into premium, price-value and popular-price brands. American Snuff’s primary brands include its largest selling moist snuff brands, GRIZZLY, in the price-value category, and KODIAK, in the premium category.

Included in All Other, among other RAI subsidiaries, are RJR Vapor, Niconovum USA, Inc., Niconovum AB and until their sale on 13 January 2016, SFRTI and various foreign subsidiaries affiliated with SFRTI.

RAI was incorporated in the State of North Carolina on 2 January 2004, and RAI Shares are listed on the NYSE under the trading symbol “RAI”. RAI’s headquarters are located at 401 North Main Street, Winston-Salem, North Carolina 27101.

RAI had consolidated net sales of $12,503 million and consolidated net income of $6,073 million for the year ended 31 December 2016 (compared to consolidated net sales of $10,675 million and consolidated net income of $3,253 million for the year ended 31 December 2015). Further information on the financial performance of RAI is set out in Part III (Historical Financial Information of the RAI Group) of this document including unaudited reconciliations of the RAI Group’s historical financial information from US GAAP to IFRS (EU).

 

6. ADSs

 

6.1 ADS Programme

The Existing BAT ADSs have unlisted trading privileges on the New York Stock Exchange MKT (the “NYSE MKT”) and no BAT securities are listed on any US securities exchange or registered pursuant to the securities laws of the United States. As a result, BAT is subject to neither the NYSE listing standards nor the corporate governance rules under the Sarbanes-Oxley Act of 2002.

BAT has entered into an amended and restated deposit agreement dated 1 December 2008, which governs the terms of BAT’s ADS programme. Since 14 February 2017, under an amendment to the amended and restated deposit agreement, each Existing BAT ADS represents one BAT Share.

As part of the Proposed Acquisition, BAT intends to register the New BAT ADSs and the New BAT Shares with the SEC and to apply for the Existing BAT ADSs and the New BAT ADSs to be approved for listing on the NYSE such that the BAT ADS programme will be changed to a Sponsored Level III ADS programme with no action required by the holders of Existing BAT ADSs to effect such change. BAT will also become subject to the reporting requirements of the Exchange Act and, accordingly, be required to file or furnish certain reports with the SEC.

As a result of the registration of the New BAT Shares with the SEC, large BAT Shareholders (with direct or indirect beneficial ownership of more than 5% of BAT) will be required to file certain reports on their beneficial ownership with the SEC. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities.

Following Completion, the Existing BAT ADSs will be fungible with the New BAT ADSs to be issued as part of the Merger Consideration.

 

6.2 Rights of ADS holders

In connection with the Proposed Acquisition, all holders of RAI Shares will only be entitled to receive cash and New BAT ADSs and may not elect to receive BAT Shares in lieu of New BAT ADSs. Once New BAT ADSs are issued, the holders of the New BAT ADSs will have the right to convert those New BAT ADSs into BAT Shares, which they may continue to hold or may sell on the LSE or the JSE. However, the holder of the New BAT ADSs will be responsible for all fees charged by the Depositary relating to any such conversion. Fees and charges are also payable by BAT ADS holders to the Depositary in relation to certain other depositary services.

While each BAT ADS represents one BAT Share, there are some differences between these two securities. These differences include:

 

  ·   BAT ADSs trade in US dollars, while BAT Shares trade in pound sterling on the LSE and South African rand on the JSE;

 

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  ·   dividends paid in respect of BAT ADSs will be paid in US dollars following conversion from pound sterling by the Depositary, while dividends paid in respect of BAT Shares listed on the LSE will be paid in pound sterling and on the JSE will be paid in South African rand. Consequently, dividends payable in respect of BAT ADSs will be subject to currency fluctuations. In addition, dividends paid in respect of BAT ADSs have a payment date which is three business days after that of the payment date of BAT Shares;

 

  ·   under the terms of an agreement between BAT and the Depositary, the Depositary has agreed to waive the fees that would otherwise be payable in connection with the issuance of BAT ADSs upon deposit of BAT Shares and the cancellation of BAT ADSs and corresponding withdrawal of BAT Shares, in each case by BAT or any of its affiliates, officers, directors or employees. The terms of this agreement may be amended at any time by BAT and the Depositary;

 

  ·   while under the terms of the deposit agreement, cash dividends paid in respect of BAT ADSs are subject to a fee of up to $0.05 per BAT ADS payable to the Depositary, under the terms of the separate agreement between BAT and the Depositary referred to above, such dividends are instead subject to a fee of up to $0.02 per BAT ADS per year (a fee of $0.01 per dividend based on the distribution of an interim and a final cash dividend per year or a fee of $0.005 per dividend based on the distribution of four quarterly cash dividends per year). Under such separate agreement, this dividend fee may not be varied by the Depositary without the consent of BAT;

 

  ·   prior to or at Completion, BAT ADSs will be listed on the NYSE (the Existing BAT ADSs have unlisted trading privileges on the NYSE MKT) while BAT Shares are listed on the LSE (with a secondary listing on the JSE);

 

  ·   holders of BAT ADSs vote the underlying BAT Shares by instructing the Depositary on how to vote such BAT Shares at a general meeting, while holders of BAT Shares vote directly at any general meetings;

 

  ·   certain shareholders’ rights, such as the right to propose resolutions or the right to convene a general meeting, may not be exercised by BAT ADS holders unless they first convert their BAT ADSs into BAT Shares; and

 

  ·   holders of BAT Shares are entitled to receive mailed copies of proxy materials and documents from BAT, while, in lieu of distributing such materials, the Depositary may distribute to holders of BAT ADSs instructions on how to retrieve such materials upon request.

 

7. Dividends and dividend policy

RAI intends to continue to pay dividends consistent with past practice and in accordance with RAI’s dividend policy during the period prior to Completion. RAI Shareholders will be entitled to BAT dividends (with record dates following Completion) in respect of the New BAT Shares underlying the New BAT ADSs from the time of issuance of such ADSs. The New BAT Shares will, when issued, rank pari passu with each other and with all Existing BAT Shares and will rank in full for all dividends and other distributions hereafter declared, made or paid in respect of the Existing BAT Shares.

BAT intends to maintain its dividend policy of a minimum 65% payout ratio post Completion and the Board expects the Proposed Acquisition to be accretive to dividends per share. BAT’s dividends are set in pence per ordinary share. It is expected that any dividend of the Combined Group will be set in the same format.

Following Completion, until the end of 2017, the Combined Group intends to maintain BAT’s stated policy of paying a dividend biannually. Beginning in 2018, the Combined Group will pay four interim quarterly dividends with respect to BAT Shares and BAT ADSs. BAT will announce the dividend amount as part of its preliminary results announcement for the year ending 31 December 2017 in February 2018 and the dividend amount will be paid in four equal instalments in May 2018, August 2018, November 2018 and February 2019. As part of the transition to quarterly dividend payments, and to ensure BAT Shareholders receive the equivalent amount of total cash payments in 2018 as they would have under the previous payment policy, an additional interim dividend will be announced in December 2017 for payment in February 2018 and will be calculated as 25% of the total cash dividend paid in 2017.

 

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The dividends paid on the BAT Shares in respect of the period covered by the historical financial information were as follows:

 

Year ended 31 December

  

Type

   Amount    LSE Ex-dividend
date
   JSE Ex-dividend
date
   Payment
date
2016    Final    118.10p    16/03/2017    15/03/2017    04/05/2017
   Interim    51.30p    18/08/2016    17/08/2016    28/09/2016
2015    Final    104.60p    17/03/2016    14/03/2016    05/05/2016
   Interim    49.40p    20/08/2015    17/08/2015    30/09/2015
2014    Final    100.60p    19/03/2015    16/03/2015    07/05/2015
   Interim    47.50p    20/08/2014    18/08/2014    30/09/2014

 

8. Dilution

Subject to Completion, up to 435,556,670 New BAT Shares will be issued in connection with the Proposed Acquisition. This will result in BAT’s issued share capital increasing by approximately 21% (including BAT Treasury Shares). Following Completion and assuming that 435,556,670 New BAT Shares are issued in connection with the Proposed Acquisition, BAT Shareholders will be subject to an immediate dilution as a result of the issue, following which they will hold approximately 81% of the Combined Group’s issued share capital (excluding BAT Treasury Shares).

 

9. Management and employees

Pursuant to the Merger Agreement, BAT will take all actions necessary to cause three directors serving on RAI’s board of directors (other than the directors designated for nomination by B&W, a subsidiary of BAT) immediately prior to Completion to be appointed to the Board upon Completion. Such directors will be selected by BAT prior to Completion after consultation with the RAI Transaction Committee.

BAT attaches great importance to the skills and experience of the existing management and employees of the BAT Group and the RAI Group and the Board believes that the Combined Group will offer greater opportunities to the employees within it.

The Combined Group’s headquarters will be located at BAT’s existing headquarters at Globe House, 4 Temple Place, London, WC2R 2PG, United Kingdom (which is also its registered office).

The BAT Group’s manufacturing footprint is expected to be enhanced as a result of the inclusion of the RAI Group’s high quality production facilities in North Carolina and Tennessee.

 

10. Structure and Conditions to the Proposed Acquisition

 

10.1 Structure of the Proposed Acquisition

The Proposed Acquisition will take place by way of a statutory merger under the laws of North Carolina, pursuant to which Merger Sub, a North Carolina corporation and an indirect wholly owned subsidiary of BAT, will merge with and into RAI, with RAI surviving the merger as an indirect wholly owned subsidiary of BAT. The Merger Agreement was entered into on 16 January 2017, the terms of which are more fully described in Part V (Summary of the Principal Terms and Conditions of the Merger Agreement) of this document.

 

10.2 Completion

Assuming the satisfaction or waiver of all Conditions, Completion is expected to take place on or about 25 July 2017. Any revision to this will be promptly notified to BAT Shareholders, by BAT, via a Regulatory Information Service. Following Completion, BAT will announce that the Proposed Acquisition has taken effect. The announcement will be made by way of a press release despatched via a Regulatory Information Service.

 

10.3 Conditions to the Proposed Acquisition

The Merger Agreement contains a number of Conditions. These include:

 

  ·   Antitrust approvals:

 

  o   expiration or termination of the applicable waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act 1976, as amended (the “HSR Act”); and

 

  o   the earlier of the expiration of the waiting period required by Japanese merger control regulations and the receipt of clearance from the Japan Fair Trade Commission.

 

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  ·   BAT Shareholder approvals:

 

  o   the approval of the Merger Agreement and other transactions contemplated by the Merger Agreement and for the Directors to allot and issue the New BAT Shares at the General Meeting.

 

  ·   RAI Shareholder approvals:

 

  o   approval of the Merger Agreement by the holders of a majority of the outstanding shares of RAI capital stock entitled to vote at the special meeting of RAI Shareholders to be called for purposes of such vote (the “RAI Special Meeting”) (the holder of Series B preferred stock of RAI (which is a wholly owned subsidiary of RAI) is not entitled to vote in respect of this stock); and

 

  o   approval of the Merger Agreement by the holders of a majority of the outstanding RAI Shares entitled to vote and present (in person or by proxy) and voting at the RAI Special Meeting that are not owned, directly or indirectly, by the BAT Group or any of RAI’s subsidiaries.

 

  ·   Admission of New BAT Shares to listing on the LSE and New BAT ADSs on the NYSE:

 

  o   approval for admission of the New BAT Shares to the premium listing segment of the Official List of the UKLA and to trading on the main market for listed securities of the LSE subject only to the issue of such New BAT Shares upon Completion; and

 

  o   approval for listing on the NYSE of the New BAT ADSs issuable to RAI Shareholders as the share portion of the Merger Consideration (subject to official notice of issuance).

 

  ·   Registration statements declared effective by the SEC:

 

  o   declaration by the SEC of the effectiveness of the registration statements filed on Form F-4 and Form F-6 relating to the New BAT Shares and New BAT ADSs to be issued as the share portion of the Merger Consideration (and the absence of any stop order suspending the effectiveness of such registration statements or any proceedings seeking such a stop order).

 

  ·   Other conditions:

 

  o   the filing of the Prospectus and this Circular with the UKLA, the approval of the Prospectus and this Circular by the UKLA and the mailing of this Circular and the publishing of the Prospectus, in each case, in accordance with applicable rules and regulations;

 

  o   absence of any temporary restraining order, preliminary or permanent injunction or other judgment or law entered, enacted, promulgated, enforced or issued by any court or other governmental entity that prevents, makes illegal or prohibits the Completion or the issuance of the New BAT Shares;

 

  o   accuracy of the representations and warranties made in the Merger Agreement by the other party, subject to certain exceptions based on a material adverse change standard; and

 

  o   performance in all material respects by the other party of the obligations required under the Merger Agreement to be performed by it at or prior to Completion.

Pursuant to the requirements of the HSR Act, BAT and RAI filed Notification and Report Forms with respect to the Proposed Acquisition with the US Federal Trade Commission (the “FTC”) and the US Department of Justice (the “DOJ”) on 6 February 2017 and requested early termination of the HSR Act waiting period. The applicable HSR Act waiting period for the Proposed Acquisition expired on 8 March 2017.

On 23 March 2017, BAT and RAI filed notifications for the Proposed Acquisition with the Japan Fair Trade Commission. Approval from the Japan Fair Trade Commission was received on 4 April 2017. As a result of the foregoing, the Conditions related to antitrust approvals required as part of the closing conditions to the Proposed Acquisition have been satisfied.

BAT’s obligation to complete the Proposed Acquisition is further conditional upon the absence of any legal restraint issued by a governmental entity under any antitrust laws that would, directly or indirectly, result in (1) any prohibition or limitation on the ownership or operation by RAI, BAT or their respective

 

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subsidiaries of any portion of the business, properties or assets of RAI, BAT or their respective subsidiaries, (2) RAI, BAT or their respective subsidiaries being compelled to dispose of or hold separate any portion of the business, properties or assets of RAI, BAT or any of their respective subsidiaries, (3) any prohibition or limitation on the ability of BAT to acquire or hold, or exercise full right of ownership of, any shares of the capital stock of the RAI Group, including the right to vote such shares, or (4) any prohibition or limitation on BAT effectively controlling the business or operations of the RAI Group.

For further information, please see Part V (Summary of the Principal Terms and Conditions of the Merger Agreement) of this document.

 

10.4 Termination fee

Pursuant to the Merger Agreement, if the Merger Agreement is terminated, BAT will be entitled to receive a termination fee of $1 billion from RAI in the event that:

 

  ·   the RAI board of directors or any committee thereof changes its recommendation to RAI Shareholders and either (1) the Merger Agreement is terminated because the RAI Shareholders fail to approve the Merger Agreement at the RAI Special Meeting or no shareholders’ meeting is held prior to 31 December 2017 (the “End Date”); or (2) BAT terminates the Merger Agreement as a result of such change in recommendation; or

 

  ·   (1) the Merger Agreement is terminated (or in certain circumstances could have been terminated) because the Proposed Acquisition has not occurred by the End Date (and at such time all antitrust approvals have been obtained and no legal restraint preventing the Completion is in effect), the RAI shareholders failed to approve the Merger Agreement at the RAI Special Meeting or RAI breached its obligations under the Merger Agreement, (2) prior to such termination, shareholder vote or breach, as applicable, and after the date of the Merger Agreement, a Company Takeover Proposal (as defined in the Merger Agreement) that contemplates acquiring a majority of the capital stock or assets of RAI was made or made known to RAI or its shareholders, and (3) within 12 months after such termination, RAI or any of its subsidiaries enters into a definitive agreement with respect to, or completes, such Company Takeover Proposal.

Pursuant to the Merger Agreement, if the Merger Agreement is terminated, RAI will be entitled to receive a termination fee of $1 billion from BAT in the event that:

 

  ·   the Board or any committee thereof changes its recommendation and either (1) the Merger Agreement is terminated because BAT Shareholders fail to approve the Resolution or no shareholders’ meeting is held prior to the End Date or (2) RAI terminates the Merger Agreement as a result of such change in recommendation; or

 

  ·   (1) the Merger Agreement is terminated (or in certain circumstances could have been terminated) because the Proposed Acquisition has not occurred by the End Date (and at such time all antitrust approvals have been obtained, no legal restraint preventing the Completion is in effect and no antitrust restriction (as defined in the Merger Agreement) is in effect), the BAT Shareholders failed to approve the Resolution at the shareholders’ meeting or BAT breached its obligations under the Merger Agreement, (2) prior to such termination, shareholder vote or breach, as applicable, and after the date of the Merger Agreement, a Parent Alternative Proposal (as defined in the Merger Agreement) that contemplates acquiring a majority of the shares in, or the assets of, BAT is publicly proposed or announced and (3) within 12 months after such termination, BAT enters into a definitive agreement with respect to, or completes, such Parent Alternative Proposal.

In addition, the Merger Agreement provides that RAI will be entitled to receive a termination fee of $500 million from BAT in the event that the Merger Agreement is terminated because the Proposed Acquisition has not occurred by the End Date and at the time of termination (1) all antitrust approvals that are Conditions have not been obtained, a legal restraint attributable to an antitrust law is in effect that prevents Completion or an antitrust restriction (as defined in the Merger Agreement) is in effect and (2) all other Conditions have been satisfied (or, in the case of any condition that is by its nature is to be satisfied at Completion, would be satisfied if Completion were to occur on the date of such termination. The Conditions related to antitrust approvals required as part of the closing conditions to the Proposed Acquisition have been satisfied. BAT must also pay a termination fee of $500 million to RAI if the Merger Agreement is terminated because a legal restraint attributable to an antitrust law that

 

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prevents Completion has become final and non-appealable. BAT will not be required to pay the termination fees described in this paragraph if RAI has not complied with its obligation to use reasonable best efforts to complete the Proposed Acquisition as promptly as practicable.

 

11. Financing

BAT currently intends to finance the cash portion of the Merger Consideration, which the Directors estimate to be approximately $24.4 billion, and related fees and expenses, with drawings under the Acquisition Facility (as defined below).

On 16 January 2017, B.A.T. International Finance p.l.c. (“BATIF”) and B.A.T. Capital Corporation (“BATCAP”) (each a wholly-owned subsidiary of BAT) as original borrowers, and BAT, as guarantor, entered into an acquisition facility with HSBC Bank plc, as agent, HSBC Bank USA, National Association, as US agent, and the financial institutions party thereto, as mandated lead arrangers and banks (the “Acquisition Facility”). Under the Acquisition Facility, the lenders are providing an unsecured and unsubordinated term loan facility in an aggregate principal amount of up to $25,000,000,000, available for the purpose of financing the Proposed Acquisition, paying fees and expenses and refinancing an existing revolving credit facility of RAI.

The Acquisition Facility comprises four credit facilities:

 

  ·   a $15,000,000,000 bridge facility which, subject to two six-month extension options exercisable at BAT’s discretion, matures on the date falling 12 months (or if both extension options are exercised, 24 months) after the earlier of (1) the date of Completion and (2) the business day that is six months after 16 January 2017 (the earlier of (1) and (2), the “Start Date”);

 

  ·   a $5,000,000,000 bridge facility which, subject to two six-month extension options exercisable at BAT’s discretion, matures on the date falling 24 months (or, if both extension options are exercised, 36 months) after the Start Date;

 

  ·   a $2,500,000,000 term loan which matures on the date falling 36 months after the Start Date; and

 

  ·   a $2,500,000,000 term loan which matures on the date falling 60 months after 16 January 2017.

The Directors currently expect that the utilised Acquisition Facility will be refinanced by bond issuances in due course. In addition, as an alternative, BAT may issue new bonds to satisfy a portion of the cash portion of the Merger Consideration in lieu of drawing on the Acquisition Facility. BAT has not entered into any definitive documentation with respect to any such bond issuances. There can be no assurance that any replacement, supplemental or refinance financing will be available to BAT at all or on acceptable terms.

 

12. 2017 Revolving Credit Facility

On 20 January 2017, BAT as guarantor and BAT, BATIF, British American Tobacco Holdings (The Netherlands) B.V. (“BATHTN”), B.A.T. Netherlands Finance B.V. (“BATNF”) and BATCAP (each a wholly-owned subsidiary of BAT), as original borrowers entered into a £5,680,000,000 forward starting revolving credit facilities agreement with HSBC Bank plc as agent and euro swingline agent, HSBC Bank USA, National Association as US agent and USD swingline agent and certain banks and financial institutions as banks and arrangers (the “2017 RCF”).

The 2017 RCF comprises the following facilities:

 

  ·   a £2,840,000,000 multi-currency revolving credit facility (“RCF Facility A”) with a $785,714,285 USD swingline sub-facility and a 473,300,000 euro swingline sub-facility each maturing on the date falling 364 days after the date of Completion and incorporating:

 

  o   an option to extend the final maturity date of RCF Facility A by 365 days (with each bank having the right to accept or decline an extension request in respect of its commitments);

 

  o   an option to term out RCF Facility A (at BAT’s option) by converting any outstanding revolving facility advances into term advances on the applicable final maturity date (the “Term Out Date”) and extending the final maturity date of RCF Facility A to either the second anniversary of the date of Completion or, if the applicable final maturity date has already been extended pursuant to the extension option, the third anniversary of the date of Completion; and

 

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  ·   a £2,840,000,000 multi-currency revolving facility (“RCF Facility B”) with a $1,571,428,571 USD swingline sub-facility and a 946,600,000 euro swingline sub-facility, each maturing on 29 May 2021. RCF Facility B effectively replaces BAT’s existing £3,000,000,000 revolving credit facility entered into on 29 May 2014 (the “2014 RCF”).

The 2017 RCF also contains an accordion feature, allowing BAT to bring one additional bank into the facility by delivering a request on or prior to the date falling six months after the date of Completion.

Revolving facility advances are to be applied in or towards the general corporate purposes of the BAT Group. Each swingline advance is to be applied in or towards refinancing short term borrowings of the BAT Group and providing support for the BAT Group’s euro (under all swingline facilities) and US (under the USD swingline facilities) commercial paper programmes. The 2014 RCF will be cancelled at Completion and the 2017 RCF will be available to draw from such time, provided applicable conditions precedent are met (which includes evidence that the 2014 RCF has been cancelled). If at any time BAT gives notice that Completion will not occur or if Completion does not occur on or before 31 March 2018, commitments under the 2017 RCF will be cancelled and this facility will not be available to be drawn. In this case the 2014 RCF will remain in place until its maturity in 2021.

 

13. Current trading and prospects for BAT and RAI

 

13.1 BAT

BAT issued, on 14 June 2017, the following trading update ahead of its closed period commencing 27 June 2017:

“The business continues to perform very well, in line with expectations.

First half revenue is expected to benefit from good pricing. As highlighted in February, first half volumes are lapping a strong prior year comparator and will be impacted by the phasing of shipments in a number of key markets, including Pakistan. Full year volume is expected to outperform the industry, which we anticipate will be down around 4%.

We expect our market share to continue to grow, driven by the Global Drive Brands.

Trading in our key markets continues to reflect the trends discussed at the Preliminary Results in February with Canada, Romania, Bangladesh and Ukraine performing well and conditions remaining challenging in Brazil, South Africa, Malaysia, France and the UK.

The performance of GLO in Sendai, Japan continues to exceed our expectations and we are on track for further Japanese and international rollout in the second half. In vapour, our share growth in Western Europe continues and we are making encouraging progress with the rollout of VYPE PEBBLE. A city test of VYPE e-Pen III is on track for Q4.

As previously stated, profit growth is expected to be weighted to the second half of the year, mainly due to the timing of volume shipments, as well as the phasing of Next Generation Product investments and marketing spend.

If exchange rates stayed the same for the remainder of the year, there would be an adverse transactional impact on operating profit of 2% for both the first half and the full year. For translation, this would be a tailwind on operating profit of approximately 13% for the half year and 7% for the full year.

First half EPS is expected to benefit from a significant translational foreign exchange tailwind of around 14%.”

 

13.2 RAI

Year ended 31 December 2016

RAI filed its Form 10-K for the year ended 31 December 2016 with the SEC on 9 February 2017.

RAI reported net sales of $12.5 billion in 2016, an increase of 17.1% compared to 2015. Comparisons for the full year were driven largely by the addition of the NEWPORT brand following the acquisition of Lorillard in June 2015. RAI’s reportable operating segments consist of RJR Tobacco, Santa Fe and American Snuff. RJR Tobacco’s net sales in 2016 were $10.3 billion, an increase of 19.5% compared to 2015, primarily due to higher volume and favourable product mix of $1.3 billion and higher net pricing of $490 million. Santa Fe’s 2016 net sales increased by 18.9% from 2015 to $973 million, due to higher volume and higher net pricing. American Snuff net sales in 2016 totalled $914 million, an increase of 6.9% compared to 2015, due to higher net pricing and higher moist snuff volume.

 

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RAI’s net income was $6.1 billion in 2016, an increase of 86.7% compared to 2015 primarily due to the recognition of the gain on divestiture of NATURAL AMERICAN SPIRIT’s business outside the United States in 2016. Each of RAI’s reportable operating segments demonstrated improved operating income during 2016.

Three months ended 31 March 2017

RAI filed its Form 10-Q for the three months ended 31 March 2017 with the SEC on 3 May 2017.

RAI reported net sales of $2.9 billion for the first quarter of 2017, an increase of 1.1% compared to the first quarter of 2016. RJR Tobacco’s net sales in the first quarter of 2017 were $2.4 billion, a decrease of 1.7% compared to the prior year period, primarily due to lower net volume/product mix of $123 million, partially offset by higher net pricing of $120 million. Lower contract manufacturing revenues and leaf sales also contributed to the decline in net sales. Santa Fe’s net sales increased by 9.2% from the prior year to $238 million, primarily due to higher volume and net pricing. American Snuff net sales totalled $242 million, an increase of 12.0% compared to the prior year, primarily due to higher net pricing and higher moist snuff volume.

RAI’s net income was $780 million in the first quarter of 2017, a decrease of 78.1% compared to the first quarter of 2016, which included a significant gain on divestiture resulting from the sale of NATURAL AMERICAN SPIRIT’s business outside the United States. RJR Tobacco’s 2017 first-quarter operating income was unfavourably impacted by lower net volume and product mix and higher State Settlement Agreement expenses, partially offset by higher net pricing when compared to the first quarter of 2016. RAI’s other two reportable operating segments reported higher operating income in the first quarter of 2017 compared to the same period in 2016.

 

14. De-listing of RAI Shares and listing of New BAT Shares

 

14.1 De-listing of RAI Shares

If the Proposed Acquisition completes, there will no longer be any publicly held RAI Shares. Accordingly, RAI Shares will be delisted from the NYSE and will be deregistered under the Exchange Act as soon as practicable following Completion, and RAI will no longer be required to file periodic reports with the SEC in respect of RAI Shares.

Prior to Completion, RAI will cooperate with BAT to cause the delisting of the RAI Shares from the NYSE as promptly as practicable after Completion, and in any event no more than two business days after Completion.

 

14.2 Listing of New BAT Shares

Under the terms of the Merger Agreement, BAT is required to use its reasonable best efforts to cause (1) the New BAT Shares to be approved for admission to the premium listing segment of the Official List of the UKLA and to trading on the main market for listed securities of the LSE and (2) the New BAT ADSs to be issued as Merger Consideration to be approved for listing on the NYSE, subject to official notice of issuance, each prior to Completion. It is a condition to both parties’ obligations to complete the Proposed Acquisition that such approvals are obtained. Accordingly, application will be made to have the New BAT Shares approved for listing by the UKLA and to trading on the main market for listed securities on the LSE and for the New BAT ADSs to be approved for listing on the NYSE. Application will also be made to have the New BAT Shares listed on the JSE.

BAT Shares have a secondary listing on the JSE in South Africa, under the abbreviated name BATS and the trading code “BTI”. As at 31 December 2016, 257,070,692 BAT Shares (being 12.68% of BAT’s issued ordinary share capital) were recorded on its South Africa branch share register.

 

15. General Meeting and the Resolutions

 

15.1 General Meeting

Set out on page 145 of this document is the Notice of General Meeting to be held at 2pm on 19 July 2017 at Hilton London Bankside, 2-8 Great Suffolk Street, London SE1 0UG, United Kingdom which the resolution to approve the Proposed Acquisition and the authority for the Directors to allot and issue the New BAT Shares in connection with the Proposed Acquisition will be proposed (the “Resolution”).

 

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15.2 Resolution

The implementation of the Proposed Acquisition is conditional upon, amongst other things, BAT Shareholders’ approval of the Resolution being obtained at the General Meeting. A summary of the Resolution is below. The full text of the Resolution is set out in the Notice of General Meeting.

The Resolution will be proposed as an ordinary resolution requiring a simple majority of votes cast in favour.

The Resolution proposes that (1) the Proposed Acquisition be approved and the Directors be authorised to make any non-material amendments, variations, waivers or extensions to the terms of the Proposed Acquisition or the Merger Agreement which they in their absolute discretion consider necessary, appropriate or desirable to implement the Proposed Acquisition and to take all steps and do all things which they consider necessary or desirable to implement the Proposed Acquisition, and (2) the Directors be unconditionally authorised in accordance with section 551 of the Companies Act 2006 to allot New BAT Shares (or relevant securities) in connection with the Proposed Acquisition up to a maximum aggregate nominal amount of £108,889,167. If granted, the authority conferred by the Resolution will expire at the conclusion of BAT’s next Annual General Meeting.

 

15.3 Actions to be taken

Please refer to Notice of General Meeting on page 145 for guidance notes on the completion and return of the Proxy Form and other applicable voting documentation.

 

15.4 Further information

Your attention is drawn to the additional information set out in Parts II to VI of this document. You are advised to read the whole document and not merely rely on the key or summarised information in this letter.

 

15.5 Financial advice

The Board has received financial advice from Centerview Partners, Deutsche Bank and UBS in relation to the Proposed Acquisition. In providing their respective financial advice to the Board, each of Centerview Partners, Deutsche Bank and UBS have relied upon the Board’s commercial assessment of the Proposed Acquisition.

 

15.6 Recommendation

The Board considers the Proposed Acquisition and the Resolution to be in the best interests of BAT and BAT Shareholders as a whole. Accordingly, the Board unanimously recommends that BAT Shareholders vote in favour of the Resolution set out in the Notice of General Meeting, as the Directors intend to do in respect of their own beneficial holdings which amount in aggregate to 765,599 BAT Shares, representing approximately 0.04% of the existing ordinary share capital of BAT (excluding treasury shares) in issue on 12 June 2017, being the Latest Practicable Date.

Yours faithfully

Richard Burrows

Chairman

 

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PART II

RISK FACTORS

The Proposed Acquisition may give rise to certain risks which, if they occur, may have a material adverse effect on the business, financial condition, results of operations or prospects of the BAT Group and, following Completion, the Combined Group. Accordingly, the risk factors should be afforded careful consideration together with all the other information set out in, or incorporated by reference into, this document in deciding whether to approve the Resolution being put to the BAT Shareholders at the General Meeting.

The risks which the Directors consider to be material as at the date of this document are set out in this Part II. The risks described in this Part II are based on information known at the date of this document but may not be the only risks to which the BAT Group and, following completion the Combined Group, is or might be exposed.

Additional risks and uncertainties, which are currently unknown to the BAT Group or that the BAT Group does not currently consider to be material, may adversely affect the business of the BAT Group and, following Completion, the Combined Group and could have material adverse effects on the business, financial condition, results of operations and future prospects of the BAT Group and, following Completion, the Combined Group. If any of the following risks were to materialise, the business, financial condition, results of operations and prospects of the BAT Group and, following Completion, the Combined Group could be materially adversely affected and the value of BAT Shares could decline and BAT Shareholders could lose all or part of their investment in those BAT Shares.

BAT Shareholders should read this document as a whole and not rely solely on the information set out in this section.

 

1. Material risks relating to the Proposed Acquisition

 

1.1 The Proposed Acquisition is subject to a number of conditions on both BAT and RAI which, if not fulfilled, or not fulfilled in a timely manner, may result in the termination of the Merger Agreement

BAT and RAI shall not be obliged to complete the Proposed Acquisition if any of the Conditions have not been met or have not been waived, if applicable. These include:

 

  ·   Antitrust approvals:
  o   expiration or termination of the applicable waiting period (or extension thereof) under the HSR Act; and

 

  o   the earlier of the expiration of the waiting period required by Japanese merger control regulations and the receipt of clearance from the Japan Fair Trade Commission.

 

  ·   BAT Shareholder approvals:
  o   the approval of the Merger Agreement, and other transactions contemplated by the Merger Agreement and for the Directors to allot and issue the New BAT Shares at the General Meeting.

 

  ·   RAI Shareholder approvals:
  o   approval of the Merger Agreement by the holders of a majority of the outstanding shares of RAI capital stock entitled to vote at the RAI Special Meeting (the holder of Series B preferred stock of RAI (which is a wholly owned subsidiary of RAI), is not entitled to vote in respect of this stock); and

 

  o   approval of the Merger Agreement by the holders of a majority of the outstanding RAI Shares entitled to vote and present (in person or by proxy) and voting at the RAI Special Meeting that are not owned, directly or indirectly, by the BAT Group or any of RAI’s subsidiaries.

 

  ·   Admission of New BAT Shares to listing on the LSE and New BAT ADSs on the NYSE:
  o   approval for admission of the New BAT Shares to the premium listing segment of the Official List of the UKLA and to trading on the main market for listed securities of the LSE subject only to the issue of such New BAT Shares upon Completion; and

 

  o   approval for listing on the NYSE of the New BAT ADSs issuable to RAI Shareholders as the share portion of the Merger Consideration (subject to official notice of issuance).

 

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  ·   Registration statements declared effective by the SEC:
  o   declaration by the SEC of the effectiveness of the registration statements filed on Form F-4 and Form F-6 relating to the New BAT Shares and New BAT ADSs to be issued as the share portion of the Merger Consideration (and the absence of any stop order suspending the effectiveness of such registration statements or any proceedings seeking such a stop order).

 

  ·   Other conditions:
  o   the filing of the Prospectus and this Circular with the UKLA, the approval of the Prospectus and this Circular by the UKLA and the mailing of this Circular and the publishing of the Prospectus, in each case, in accordance with applicable rules and regulations;

 

  o   absence of any temporary restraining order, preliminary or permanent injunction or other judgment or law entered, enacted, promulgated, enforced or issued by any court or other governmental entity that prevents, makes illegal or prohibits the Completion or the issuance of the New BAT Shares;

 

  o   accuracy of the representations and warranties made in the Merger Agreement by the other party, subject to certain exceptions based on a material adverse change standard; and

 

  o   performance in all material respects by the other party of the obligations required under the Merger Agreement to be performed by it at or prior to Completion.

Pursuant to the requirements of the HSR Act, BAT and RAI filed Notification and Report Forms with respect to the Proposed Acquisition with the FTC and DOJ on 6 February 2017 and requested early termination of the HSR Act waiting period. The applicable HSR Act waiting period for the Proposed Acquisition expired on 8 March 2017.

On 23 March 2017, BAT and RAI filed notifications for the Proposed Acquisition with the Japan Fair Trade Commission. Approval from the Japan Fair Trade Commission was received on 4 April 2017. As a result of the foregoing, the Conditions related to antitrust approvals required as part of the closing conditions to the Proposed Acquisition have been satisfied.

BAT’s obligation to complete the Proposed Acquisition is further conditional upon the absence of any legal restraint issued by a governmental entity under any antitrust laws that would, directly or indirectly, result in (1) any prohibition or limitation on the ownership or operation by RAI, BAT or their respective subsidiaries of any portion of the business, properties or assets of RAI, BAT or their respective subsidiaries, (2) RAI, BAT or their respective subsidiaries being compelled to dispose of or hold separate any portion of the business, properties or assets of RAI, BAT or any of their respective subsidiaries, (3) any prohibition or limitation on the ability of BAT to acquire or hold, or exercise full right of ownership of, any shares of the capital stock of the RAI Group, including the right to vote such shares, or (4) any prohibition or limitation on BAT effectively controlling the business or operations of the RAI Group. See Part V (Summary of the principal terms and conditions of the Merger Agreement) of this document.

Many of the Conditions are not within either BAT’s or RAI’s control, and neither company can predict when or if these Conditions will be satisfied. If any of these Conditions are not satisfied or waived prior to 31 December 2017, it is possible that the Merger Agreement may be terminated. Although BAT and RAI have agreed in the Merger Agreement to use their reasonable best efforts, subject to certain limitations, to complete the Proposed Acquisition as promptly as practicable, the Conditions may fail to be satisfied. In addition, satisfying the Conditions may take longer, and could cost more, than BAT and RAI expect. Any delay in completing the Proposed Acquisition may adversely affect the synergies and other benefits that BAT expects to achieve if the Proposed Acquisition and the integration of the companies’ respective businesses are not completed within the expected timeframe. See Part V (Summary of the principal terms and conditions of the Merger Agreement) of this document.

 

1.2 BAT will be required to complete the Proposed Acquisition whether or not financing is available and BAT may encounter difficulties or high costs associated with securing refinancing of debt incurred in connection with the Proposed Acquisition

The receipt of financing by BAT is not a condition to Completion and, accordingly, BAT will be required to complete the Proposed Acquisition (assuming that all of the Conditions are satisfied) whether or not the Acquisition Facility, entered into for the purpose of financing the Proposed Acquisition, or other

 

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financing is available, at all or on acceptable terms. Under the Acquisition Facility, provided certain key conditions precedent have been satisfied (including, inter alia, confirmation from BAT of the receipt of the requisite approvals by BAT Shareholders and RAI Shareholders to complete the Proposed Acquisition), banks are obliged to participate in advances during the availability period unless there is a Major Default or breach of a Major Representation (each as defined in the Acquisition Facility and including non-payment, breach of the negative pledge or disposals restrictions, insolvency of an obligor and certain other key defaults). In addition, the interest rate applicable to borrowings under the Acquisition Facility will be based on floating interest rates, which could fluctuate significantly over the term of the Acquisition Facility.

BAT has announced that, to the extent the Acquisition Facility is drawn to finance the cash portion of the Merger Consideration, it intends to refinance the loans under that facility through issuances of new bonds in due course. Further, BAT may decide to pursue financing that would replace or supplement financing available under the Acquisition Facility. In particular, the Acquisition Facility includes a $15 billion tranche which, subject to two six-month extension options exercisable at BAT’s discretion, matures on the date falling 12 months (or, if both extension options are exercised, 24 months) after the Start Date, a $5 billion tranche which, subject to two six-month extension options exercisable at BAT’s discretion, matures on the date falling 24 months (or, if both extension options are exercised, 36 months) after the Start Date, a $2.5 billion tranche which matures on the date falling 36 months after the Start Date and a $2.5 billion tranche which matures on the date falling 60 months after 16 January 2017. There is no guarantee that BAT would be able to replace, supplement or refinance the Acquisition Facility at all or on terms acceptable to BAT. The terms of any debt incurred to replace, supplement or refinance the Acquisition Facility may be materially worse than the terms of the Acquisition Facility. BAT’s ability to obtain financing to refinance the Acquisition Facility will be subject to various factors, including market conditions, operating performance and the BAT Group’s credit rating.

Following announcement of the Proposed Acquisition, Standard & Poor’s Ratings Services downgraded the long-term rating of the BAT Group from A- to BBB+ and reaffirmed the A-2 short term rating of the BAT Group and Moody’s Investors Service downgraded the long-term rating of the BAT Group from A3 to Baa2 and reaffirmed the P-2 short term rating of the BAT Group. Any impairment of the BAT Group’s ability to obtain future financing on favourable terms, including as a result of a reduction of the BAT Group’s credit rating, could have an adverse effect on the BAT Group’s ability to finance the cash portion of the Merger Consideration with the issuance of debt securities or with another alternative to the Acquisition Facility, or to refinance the Acquisition Facility if drawn.

 

1.3 Under the Merger Agreement, BAT, through its subsidiaries, will acquire RJR Tobacco Company’s NEWPORT brand, the leading US menthol cigarette brand; however, any action by the FDA or any other governmental authority that could have the effect of banning or materially restricting the use of menthol in tobacco products would not give rise to a right to terminate the Merger Agreement

As a result of the Proposed Acquisition, the BAT Group will acquire RJR Tobacco Company’s NEWPORT brand, the leading US menthol cigarette brand, the sales of which, together with the RAI Group’s other menthol brands, represent a substantial portion of the RAI Group’s consolidated total net sales. The RAI Group estimates that approximately 50% of its total consolidated net sales were attributable to menthol cigarettes for the year ended 31 December 2016. In 2013, the FDA issued its preliminary scientific evaluation regarding menthol cigarettes, concluding that menthol cigarettes adversely affect initiation, addiction and cessation compared to non-menthol cigarettes. In 2013, the FDA also issued an Advance Notice of Proposed Rulemaking, seeking comments on various issues relating to the potential regulation of menthol cigarettes. Although it is not possible to predict whether or when the FDA will take actions, if the FDA or any other governmental authority were to adopt regulations banning or severely restricting the use of menthol in tobacco products or the sale of menthol cigarettes, those regulations could have a material adverse effect on sales of the NEWPORT brand and the menthol styles of other RAI Group brands, which could have an adverse effect on the results of operations, cash flows and financial position of the RAI Group, and following Completion, the Combined Group.

Under the terms of the Merger Agreement, BAT and RAI expressly agreed that a menthol regulatory action would not be considered in determining whether a material adverse effect, as defined in the Merger Agreement, on a party had occurred, and would not give rise to a right to terminate the Merger Agreement.

 

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1.4 Litigation against certain members of the RAI Group related to tobacco products could have an adverse effect on the consolidated results of operations, cash flows and financial position of the RAI Group; however, such litigation may not give rise to a right to terminate the Merger Agreement

Certain members of the RAI Group have been named in a large number of tobacco-related legal actions, proceedings or claims and it is likely that legal actions, proceedings and claims arising out of the sale, distribution, manufacture, development, advertising, marketing, promotion and claimed health effects of cigarettes and other tobacco products will continue to be filed against the BAT Group, the RAI Group and other tobacco companies for the foreseeable future. These legal actions, proceedings and claims could impose substantial monetary obligations on the RAI Group and could have an adverse effect on the results of operations, cash flows and financial position of the RAI Group and, following Completion, the Combined Group. However, under the terms of the Merger Agreement, BAT and RAI expressly agreed that all actions or judgments regarding any tobacco litigation that was commenced prior to the date of the Merger Agreement would not be considered in determining whether a material adverse effect, as defined in the Merger Agreement, on a party has occurred and would not give rise to a right to terminate the Merger Agreement. In addition, any such tobacco litigation that is commenced on or after the date of the Merger Agreement (other than any such litigation brought by or on behalf of any governmental entity to the extent such action or judgment is not a part of or an extension or expansion of any litigation commenced prior to the date of the Merger Agreement) would also not be considered in determining whether a material adverse effect on a party has occurred, and would not give rise to a right to terminate the Merger Agreement. Any legal actions, proceedings and claims could impose substantial monetary obligations on the RAI Group and could have an adverse effect on the results of operations, cash flows and financial position of the RAI Group, and following Completion, the Combined Group.

 

1.5 The Proposed Acquisition is subject to the receipt of numerous approvals, including from BAT Shareholders and RAI Shareholders. Failure to obtain these approvals would prevent Completion

Before the Proposed Acquisition can be completed, (1) BAT Shareholders must approve the Merger Agreement and the transactions contemplated thereby as a class 1 transaction and authorise the Directors to allot and issue the New BAT Shares, (2) holders of a majority of the outstanding shares of RAI capital stock entitled to vote at the RAI Special Meeting must approve the Merger Agreement (the holder of Series B preferred stock of RAI (which is a wholly owned subsidiary of RAI) is not entitled to vote in respect of this stock) and (3) holders of a majority of the outstanding RAI Shares entitled to vote and present (in person or by proxy) and voting at the RAI Special Meeting that are not owned, directly or indirectly, by the BAT Group or any of RAI’s subsidiaries, must approve the Merger Agreement. Although BAT has agreed to vote shares of RAI capital stock owned by the BAT Group in favour of the Proposed Acquisition in respect of (2) above, there can be no assurance that the approvals referred to in (2) above will be obtained. Furthermore, even if a majority of the outstanding shares of RAI capital stock, referred to in (2) above, are voted in favour of the Proposed Acquisition, Completion will not take place if holders of a majority of the outstanding RAI Shares entitled to vote and present (in person or by proxy) and voting at the RAI Special Meeting and that are not owned, directly or indirectly, by the BAT Group or RAI’s subsidiaries, referred to in (3) above, do not approve the Merger Agreement. Failure to obtain the required approvals within the expected time frame, or having to make significant changes to the structure, terms or conditions of the Proposed Acquisition to obtain such approvals, may result in a material delay in, or the abandonment of, the Proposed Acquisition. Any delay in Completion may adversely affect the synergies and other benefits that BAT expects to achieve assuming the Proposed Acquisition and the integration of the BAT Group’s and the RAI Group’s respective businesses are completed within the expected timeframe.

 

1.6 After Completion, the BAT Group may fail to successfully integrate the RAI Group into its business, the Combined Group may fail to realise the expected synergies and other benefits of the Proposed Acquisition and the costs to achieve the synergies and benefits may be higher than anticipated

The BAT Group and the RAI Group have operated and, until Completion, will continue to operate, independently, and there can be no assurances that their businesses can be integrated successfully. The success of the Proposed Acquisition will depend, in part, on the effectiveness of the integration process and the ability of the Combined Group to realise the expected synergies and other benefits from combining the businesses of the BAT Group and the RAI Group. There is also no assurance that

 

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the costs to integrate and achieve the synergies will not be higher than anticipated. The Combined Group’s ability to realise these anticipated benefits and synergies is subject to certain risks, including the following:

 

  ·   changes or conflicts in corporate culture, controls, procedures and systems;

 

  ·   retaining existing employees and attracting new employees;

 

  ·   maintaining relationships with customers, suppliers and other constituencies; and

 

  ·   inefficiencies associated with the integration and management of the operations of the Combined Group.

The BAT Group will be required to devote significant management attention and resources to integrating the business practices and operations of the BAT Group and the RAI Group, which may result in diversion of the attention of each group’s management and employees from ongoing operations, the lack of personnel or other resources to pursue other potential business opportunities and the disruption of, or the loss of momentum in, each group’s ongoing businesses.

BAT and RAI expect to incur significant costs associated with the Proposed Acquisition and combining the operations of the two groups. The significant costs associated with the Proposed Acquisition include, among others, fees and expenses of financial advisers and other advisers and representatives, certain employment-related costs relating to employees of the RAI Group, fees and expenses related to the Acquisition Facility and the refinancing of the Acquisition Facility, costs of defending any potential litigation related to the Proposed Acquisition, costs of public relations firms engaged in connection with the Proposed Acquisition, filing fees due in connection with filings required under the HSR Act and filing fees and printing and mailing costs for the Prospectus, this Circular and the Form F-4. Some of these costs have already been incurred or may be incurred regardless of whether the Proposed Acquisition is completed, including a portion of the fees and expenses of financial advisers and other advisers and representatives, filing fees under the HSR Act and costs related to the Prospectus, this Circular and Form F-4. The BAT Group will also incur fees and costs related to formulating and implementing integration plans with respect to the two groups, including systems integration costs. While the Directors believe that the costs associated with the Proposed Acquisition and expected synergies have been reasonably estimated, unanticipated events or integration issues may arise which result in a delay or reduction in the benefits anticipated from the Proposed Acquisition, or in costs significantly in excess of those estimated.

If the Combined Group is not able to successfully combine the businesses of the BAT Group and the RAI Group within the anticipated time frame, or at all, the expected synergies and other benefits of the Proposed Acquisition may not be realised fully or at all or may take longer to realise than expected, the combined businesses may not perform as expected and the value of the BAT Shares and BAT ADSs (including the share portion of the Merger Consideration) may be adversely affected. Accordingly, even if the Proposed Acquisition is completed, the contemplated synergies and benefits may not be realised fully, or at all, or may take longer to realise than expected.

 

1.7 Uncertainties associated with the Proposed Acquisition may cause a loss of the RAI Group’s senior management personnel and other key employees, which could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group following Completion

The Combined Group’s success after Completion will depend in part upon its ability to hire key senior management personnel and employees and to retain key senior management personnel and other key employees of the RAI Group. The employees of the RAI Group may experience uncertainty about their roles within the Combined Group following the Proposed Acquisition. In addition, certain of the RAI Group’s equity incentive and other compensation arrangements contain change of control clauses providing for outstanding equity awards to vest or compensation or benefits to be provided to RAI directors or executive officers either upon an RAI change in control, or in connection with certain terminations of employment on or following an RAI change in control. If completed, the Proposed Acquisition would constitute an RAI change in control for the purposes of these equity incentive and other compensation arrangements, thereby resulting in the settlement of certain outstanding equity awards and, in the event of certain terminations of employment on or following an RAI change in control, giving rise to vesting of certain other outstanding equity awards and other payments in connection with an RAI change in control. Such uncertainty and availability of payments may inhibit the ability to retain key senior management personnel and other key employees following Completion.

 

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Accordingly, there can be no assurance that key RAI senior management personnel and other key employees can be retained either prior to or following Completion to the same extent that the RAI Group has previously been able to attract and retain its employees, which could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group following Completion.

 

1.8 The business relationships of the RAI Group may be subject to disruption due to uncertainty associated with the Proposed Acquisition, which could have an adverse effect on the results of operations, cash flows and financial position of the RAI Group and, following Completion, the Combined Group

Parties with which the RAI Group does business may experience uncertainty associated with the Proposed Acquisition and related transactions, including with respect to current or future business relationships with the RAI Group or, following Completion, the Combined Group. The business relationships of the RAI Group may be subject to disruption as customers, distributors, suppliers, vendors and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than the RAI Group or, following Completion, the Combined Group. These disruptions could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group following Completion, including an adverse effect on the Combined Group’s ability to realise the expected synergies and other benefits of the Proposed Acquisition. The risk, and adverse effect, of any disruption could be exacerbated by a delay in Completion or termination of the Merger Agreement.

 

1.9 The Merger Agreement subjects the BAT Group and the RAI Group to restrictions on their respective business activities prior to Completion

The Merger Agreement subjects the BAT Group and the RAI Group to restrictions on their respective business activities and obligates the BAT Group and the RAI Group to generally operate their respective businesses in the ordinary course in all material respects consistent with past practice prior to Completion. These restrictions could prevent the BAT Group and the RAI Group from pursuing attractive business opportunities that arise prior to Completion and are outside the ordinary course of business, or otherwise have an adverse effect on the BAT Group’s or the RAI Group’s results of operations, cash flows and financial position.

 

1.10 The Proposed Acquisition may be subject to litigation, which could delay the Proposed Acquisition and prevent Completion.

Members of the BAT Group and the RAI Group may in the future be party to legal proceedings and claims related to the Proposed Acquisition. Legal challenges to the Proposed Acquisition could result in an injunction, preventing or delaying Completion.

 

1.11 The exchange ratio is fixed and will not be adjusted in the event of any change in the market price of BAT ADSs, BAT Shares or RAI Shares. Because the market price of BAT ADSs and BAT Shares may fluctuate, the value of the Merger Consideration that BAT will be required to pay in the Proposed Acquisition is uncertain

In the Proposed Acquisition, each RAI Share (other than any RAI Shares owned by the BAT Group or RAI Shares owned by RAI Shareholders who have properly asserted and not lost or effectively withdrawn a demand for appraisal rights pursuant to Article 13 of the NCBCA) automatically will be converted into the right to receive the Merger Consideration, consisting of (1) a number of BAT ADSs representing 0.5260 of a New BAT Share, plus (2) $29.44 in cash, without interest. No fractional New BAT ADSs will be issued in the Proposed Acquisition, and RAI Shareholders will receive cash in lieu of any fractional New BAT ADS (based on the net cash proceeds from the sale by the Exchange Agent of the aggregated New BAT ADSs).

Though the cash portion of the Merger Consideration is known, because the exchange ratio is fixed and will only be adjusted in certain limited circumstances (including recapitalisations, reclassifications, share splits or combinations, exchanges, mergers, consolidations or readjustments of shares, or share dividends or similar transactions involving BAT or RAI), the value of the share portion of the Merger Consideration will depend on the market price of BAT ADSs, BAT Shares and RAI Shares at the time of Completion. The exchange ratio will not be adjusted for changes in the market price of BAT ADSs, BAT Shares or RAI Shares or in exchange rates between the date of signing the Merger Agreement and Completion. There will be a lapse of time between the date on which RAI Shareholders vote on the Merger Agreement at the RAI Special Meeting and the date on which RAI Shareholders entitled to

 

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receive New BAT ADSs actually receive such New BAT ADSs. The value of the share portion of the Merger Consideration has fluctuated since the date of the announcement of the Proposed Acquisition and will continue to fluctuate from the date of the Prospectus to the date of Completion and thereafter. The closing price per RAI Share on the NYSE as at 20 October 2016, the last trading date before the public announcement of the Proposed Acquisition, was $47.17, and the closing price per RAI Share has fluctuated as high as $67.73 and as low as $52.67 since that date and 12 June 2017, the Latest Practicable Date. The closing price of BAT ADSs on the NYSE MKT as at 20 October 2016, the last trading day before the public announcement of BAT’s proposal to merge with RAI, was $59.07 (after giving effect to the BAT ADS ratio change as at 14 February 2017), and the closing price per BAT ADS has fluctuated as high as $73.28 and as low as $52.97 since that date and 12 June 2017, the Latest Practicable Date. The closing price of BAT Shares on the LSE as at 20 October 2016, was £48.03, and the closing price per BAT Share has fluctuated as high as £56.43 and as low as £42.59 since that date and 12 June 2017, the Latest Practicable Date. Accordingly, at the time of the General Meeting, the value of the share portion of the Merger Consideration will not be known. Share price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in the BAT Group’s and the RAI Group’s respective operations and prospects, cash flows, and financial position, foreign exchange fluctuations, any potential shareholder litigation related to the Proposed Acquisition, market assessments of the likelihood of Completion, the timing of the Proposed Acquisition, regulatory considerations, the anticipated dilution to holders of BAT Shares and BAT ADSs as a result of the issuance of the share portion of the Merger Consideration and results of smoking and health litigation. Therefore as the market price of BAT ADSs, BAT Shares and RAI Shares may fluctuate, the value of the Merger Consideration that BAT will be required to pay in the Proposed Acquisition is uncertain. BAT Shareholders and RAI Shareholders are urged to obtain current market quotations for BAT ADSs, BAT Shares and RAI Shares.

 

1.12 The Merger Agreement limits the ability of BAT to pursue alternatives to the Proposed Acquisition prior to Completion

The Merger Agreement contains provisions that make it more difficult for BAT to pursue alternatives to the Proposed Acquisition prior to Completion and limits the ability of BAT to terminate the Merger Agreement. These provisions include a general prohibition on BAT from soliciting alternatives to the Proposed Acquisition and, subject to certain exceptions, entering into discussions relating to an alternative to the Proposed Acquisition. The Merger Agreement also contains provisions that make it more difficult for the Board to withhold, withdraw or qualify its recommendation that BAT Shareholders approve the Merger Agreement. Subject to certain rights to match the terms of proposed alternative transactions, the Board may withhold or withdraw its recommendation only if it determines in good faith that the failure to withhold or withdraw its recommendations would be inconsistent with its fiduciary duties to BAT Shareholders under applicable law. See Part V (Summary of the principal terms and conditions of the Merger Agreement) of this document.

Even if the Board withholds, withdraws or qualifies its recommendation with respect to the Merger Agreement, in accordance with the terms and conditions of the Merger Agreement, BAT will still be required to submit the approval of the Merger Agreement to a vote by its shareholders at the General Meeting, unless the Merger Agreement is terminated prior to the date of the General Meeting in accordance with its terms.

In certain cases, upon termination of the Merger Agreement following a withholding, withdrawal or qualification of the recommendation of the Board, BAT will be required to pay to RAI a termination fee of $1 billion.

If the Merger Agreement is terminated and BAT determines to seek another business combination, BAT may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Proposed Acquisition. In certain circumstances, a termination fee of $1 billion may be payable by BAT if the Merger Agreement is terminated and BAT enters into a definitive agreement with respect to an alternative transaction (see Part V (Summary of the principal terms and conditions of the Merger Agreement) of this document).

 

1.13 BAT may waive one or more conditions to the Proposed Acquisition without resoliciting shareholder approval for the Proposed Acquisition

Certain conditions to BAT’s obligations to complete the Proposed Acquisition may be waived, in whole or in part, to the extent legally permissible, either unilaterally or by agreement of BAT and RAI. In the event that any such waiver does not require resolicitation of shareholders, the parties will have the discretion to complete the Proposed Acquisition without seeking further shareholder approval.

 

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1.14 The substantial additional indebtedness that the BAT Group will incur in connection with the Proposed Acquisition could adversely affect the BAT Group’s, and following Completion, the Combined Group’s, financial position, including by decreasing the BAT Group’s, and following Completion, the Combined Group’s, business flexibility and resulting in a further reduction of the BAT Group’s, and following Completion, the Combined Group’s credit rating

Following Completion, the Combined Group will have substantially increased debt compared to the BAT Group’s historical level of debt. The BAT Group’s consolidated net debt was £16.8 billion as at 31 December 2016. The BAT Group’s pro forma net debt as at 31 December 2016 if the Proposed Acquisition had been completed on 31 December 2016, would have been approximately £46.1 billion, of which £25.2 million, or 51%, of the estimated pro forma gross interest bearing debt of the BAT Group following the Proposed Acquisition would have been at variable rates of interest as at 31 December 2016. BAT expects to incur approximately $38 billion of additional debt in connection with the Proposed Acquisition, as a result of financing to complete the Proposed Acquisition and debt assumed in the Proposed Acquisition. This increased level of debt could have the effect, among other things, of reducing the Combined Group’s flexibility to respond to changing business and economic conditions and will have the effect of increasing the Combined Group’s interest expense thereby tightening restrictive covenants under BAT’s revolving credit facility agreement. In addition, the amount of cash required to service the Combined Group’s increased debt levels and increased aggregate dividends following Completion and thus the demands on the Combined Group’s cash resources will be greater than the amount of cash flows required to service the BAT Group’s debt and pay dividends prior to the Proposed Acquisition. The increased levels of debt and dividends following Completion could also reduce funds available for the Combined Group’s investments in research and development and capital expenditures, share repurchases and other activities and may create competitive disadvantages for the Combined Group relative to other companies with lower debt levels.

The BAT Group’s credit rating impacts the cost and availability of future borrowings and, accordingly, the BAT Group’s cost of capital. The BAT Group’s credit rating reflects each credit rating organisation’s opinion of the BAT Group’s financial strength, operating performance and ability to meet the BAT Group’s debt obligations. Following the announcement of the Proposed Acquisition, Standard & Poor’s Ratings Services downgraded the BAT Group’s long-term rating from A- to BBB+ and reaffirmed BAT’s A-2 short term rating and Moody’s Investors Service downgraded the BAT Group’s long-term rating from A3 to Baa2 and reaffirmed the BAT Group’s P-2 short term rating. The reduction in the BAT Group’s credit rating by Standard & Poor’s Ratings Services and Moody’s Investors Service and any further reduction may limit the BAT Group’s ability to borrow at interest rates consistent with the interest rates that have been available to the BAT Group prior to the Proposed Acquisition. If the BAT Group’s credit rating is reduced further, the BAT Group may not be able to sell additional debt securities or borrow money in the amounts, at the times or interest rates or upon the more favourable terms and conditions that might be available if the BAT Group’s current credit rating is maintained. Any impairment of the BAT Group’s ability to obtain future financing on favourable terms could have an adverse effect on the BAT Group’s ability to finance the cash portion of the Merger Consideration with the issuance of debt securities or another alternative to the Acquisition Facility on terms more favourable than under the Acquisition Facility, or to refinance the Acquisition Facility if drawn.

In addition, future borrowings under circumstances in which the Combined Group’s debt is rated below investment grade may contain further restrictions that impose significant restrictions on the way the Combined Group operates following the Proposed Acquisition.

 

1.15 BAT Shareholders and RAI Shareholders will have a reduced ownership and voting interest in the Combined Group than they currently have in BAT and RAI, respectively

Following Completion, BAT Shareholders and RAI Shareholders will own a smaller percentage of the Combined Group than they currently own of BAT and RAI, respectively. Based on the number of RAI Shares and BAT Shares in issue at the Latest Practicable Date and the total number of RAI Shares that are expected to be settled for BAT ADSs in connection with the Proposed Acquisition, it is expected that, immediately following Completion, existing BAT Shareholders will own approximately 81% of the Combined Group and former RAI Shareholders will own approximately 19% of the Combined Group’s share capital (excluding BAT Treasury Shares). As a consequence, the number of voting rights which can be exercised and the influence which may be exerted by shareholders in respect of the Combined Group will be reduced.

 

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1.16 The Combined Group may have to make additional contributions following Completion to fund the RAI Group’s pension and other post-retirement benefit plans, in addition to the BAT Group’s pension plans

The BAT Group and the RAI Group currently maintain and contribute to defined benefit pension plans and other post-retirement benefit plans that cover various categories of employees and retirees. The obligation to make contributions to fund benefit obligations under these pension and other post-retirement benefit plans is based on actuarial valuations, which are based on certain assumptions, including the long-term return on plan assets and discount rate. The Combined Group may have to make additional contributions following Completion to fund the RAI Group’s pension and other post-retirement benefit plans, in addition to any such BAT Group pension plans. Additional contributions could have an adverse effect on the cash flows of the Combined Group.

 

2. Material risks relating to the BAT Group which will be impacted by the Proposed Acquisition

 

2.1 Completion will result in the BAT Group becoming subject to US regulations which are different from the regulations to which the BAT Group is currently subject. Current and future US regulations could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group following Completion

Prior to Completion, the BAT Group’s main exposure to the US market is limited to its ownership of RAI Shares. Following Completion, the BAT Group’s exposure to the impact of a wide variety of US federal, state and local laws would increase (by virtue of BAT’s beneficial ownership of 100% of the shareholding of RAI). Any such existing or future additional regulations will pose an increased compliance burden for the BAT Group and, particularly where supplemented by new regulations, this could lead to higher costs and greater complexity, and potential reputational damage, product recall, regulatory sanctions or fines in connection with inadvertent breach. The enactment of unduly onerous and restrictive regulation may also adversely affect BAT’s share price and could have a material adverse effect on the results of operations, cash flows and financial position of the Combined Group.

These regulations include limitations on the advertising, sale and/or use of tobacco products in the United States. For example, there are US local laws that prohibit the sale of certain tobacco products, certain types of marketing practices, such as consumer coupons, or the consumption of cigarettes and other tobacco products in restaurants and other public places. Private businesses also have adopted policies that prohibit or restrict, or are intended to discourage, smoking and tobacco use. These US laws and regulations could result in a decline in the overall sales volume of tobacco products in the United States, which could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group.

Following Completion, the Combined Group will be subject to, among others, the following US laws and regulations:

FDA regulations

The FDA has broad authority over the manufacture, sale, marketing and packaging of tobacco products. Regulations issued by the FDA could, among other things, result in a decrease in cigarette and smokeless tobacco product sales in the United States, including sales of the Combined Group’s brands, and may increase the costs of operations of the Combined Group following Completion.

For example, the ability of the Combined Group to introduce new tobacco products in the United States could be adversely affected by FDA rules and regulations. Under the FDA Tobacco Act, for a manufacturer to launch a new tobacco product or modify an existing tobacco product after 22 March 2011, the manufacturer must obtain an order from the FDA’s Center for Tobacco Products (the “CTP”), allowing the new or modified product to be marketed. Similarly, a manufacturer that introduced a product between 15 February 2007 and 22 March 2011, was required to file a substantial equivalence report with the CTP demonstrating either (1) that the new or modified product had the same characteristics as a product commercially available as at 15 February 2007, referred to as a predicate product, or (2) if the new or modified product had different characteristics than the predicate product, that it did not raise different questions of public health. A product subject to such report is referred to as a provisional product. A manufacturer may continue to market a provisional product unless and until the CTP issues an order that the provisional product is not substantially equivalent (“NSE”), in which case the FDA could then require the manufacturer to remove the provisional product from the market. On 15 September 2015, the CTP issued four NSE orders to RJR Tobacco Company, determining that

 

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four cigarette styles were not substantially equivalent to their respective predicate products, and ordering that RJR Tobacco Company immediately stop all distribution, importation, sale, marketing and promotion of these provisional products. RJR Tobacco Company has complied with these NSE orders. Although the sales of the provisional products subject to the foregoing NSE orders are not material to RJR Tobacco Company, substantially all of the RAI Group’s products currently on the market are provisional products. If the CTP were to issue NSE orders with respect to other provisional products of the RAI Group such orders, if not withdrawn or invalidated, would have an adverse impact on the sales of the products subject to the orders, and could have an adverse impact on the results of operations, cash flows and financial position of the RAI Group, and, following Completion the Combined Group.

On 27 August 2015 the FDA sent a warning letter to the RAI Group’s operating subsidiary SFNTC, claiming that SFNTC’s use of the terms “Natural” and “Additive Free” in the product labelling and advertising for NATURAL AMERICAN SPIRIT cigarettes violates the FDA Tobacco Act. Pursuant to an agreement entered into with the FDA, SFNTC has committed to phasing out use of the terms “Natural” and “Additive Free” from product labelling and advertising for NATURAL AMERICAN SPIRIT cigarettes on an established timeframe. While SFNTC may continue to use the term “Natural” in the NATURAL AMERICAN SPIRIT brand name and trademarks, SFNTC’s scheduled deletion of the terms “Natural” and “Additive Free” from the labelling and advertising of its NATURAL AMERICAN SPIRIT cigarettes could have an adverse effect on the sale of such cigarettes and, as a result, on the results of operations, cash flows and financial position of the RAI Group and, following Completion, the Combined Group.

Further, the FDA may seek to require the reduction of nicotine levels under the FDA Tobacco Act and also may require the reduction or elimination of other constituents. For instance, the FDA has proposed a rule that, if adopted, would require the reduction, over a three-year period, of the levels of N- nitrosonornicotine (“NNN”) contained in smokeless tobacco products. The adoption of this proposed rule is currently suspended by virtue of a federal regulatory freeze imposed by the US President. It is not known whether or when this proposed rule will be adopted, and, if adopted, whether the final rule will be the same as or similar to the proposed rule. If the proposed rule is adopted, however, in its current form (or in a form substantially similar to its current form), compliance or the inability to comply could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group.

FDA regulations in relation to Next Generation Products

The FDA may also issue other regulations that, among other things, make it more difficult for the Combined Group to grow its e-cigarette business in the United States or that limit the level of nicotine in cigarettes made, sold or marketed in the United States. On 10 May 2016, the FDA issued a final regulation deeming e-cigarettes and certain other tobacco products to be subject to the FDA’s regulatory authority under the FDA Tobacco Act. As a result, such newly “deemed” tobacco products will be subject to many of the same requirements of the FDA Tobacco Act that currently apply to cigarettes and smokeless tobacco products. Under the final regulation, any newly “deemed” tobacco products, including e-cigarettes that were not on the market as at 15 February 2007 will be considered a new tobacco product subject to premarket review by the FDA. Neither RJR Vapor’s VUSE e-cigarette, nor virtually any other e-cigarette, was on the market as at such date. As a result, e-cigarette manufacturers, including RJR Vapor and, following Completion, the Combined Group will not be able to utilise the substantial equivalence pathway for clearing these products, but instead will have to file premarket tobacco product applications. These applications must be filed by 8 August 2018, for e-cigarette products in the market as at 8 August 2016. A manufacturer that files a premarket application for such a product may continue to market the product for a certain period of time pending the FDA’s review of the application. For products that were not in the market by 8 August 2016, manufacturers must file and await clearance of such premarket applications before placing such products into commerce.

For the FDA to clear a premarket tobacco product application covering an e-cigarette, the applicant must show that the marketing of the e-cigarette would be appropriate for the protection of the public health. At present, there is substantial uncertainty over how the FDA will interpret that standard when determining whether to clear an e-cigarette premarket tobacco application. If following Completion, the Combined Group is unable to obtain FDA clearance, or obtains FDA clearance on a delayed basis, of premarket applications for VUSE and other e-cigarette products, then there could be an adverse effect on the results of operations, cash flows, and financial position of the Combined Group.

 

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Regulations banning or materially restricting the use of menthol in tobacco products

As a result of the Proposed Acquisition the Combined Group will acquire RJR Tobacco Company’s NEWPORT brand, and other menthol brands, which represent a substantial portion of RAI’s total consolidated net sales. The RAI Group estimates that approximately 50% of its total consolidated net sales were attributable to menthol cigarettes for the year ended 31 December 2016. The FDA may adopt regulations banning or severely restricting the use of menthol in tobacco products or the sale of menthol cigarettes. See “Under the Merger Agreement, BAT, through its subsidiaries, will acquire RJR Tobacco Company’s NEWPORT brand, the leading US menthol cigarette brand; however, any action by the FDA or any other governmental authority that could have the effect of banning or materially restricting the use of menthol in tobacco products would not give rise to a right to terminate the Merger Agreement” at paragraph 1.3 of Part II (Risk Factors) of this Circular.

Advertising and marketing of tobacco products

The RAI Group is, and, following Completion, the Combined Group will be, subject to significant limitations on the advertising and marketing of tobacco products in the United States. Additional such regulation could harm the value of the RAI Group and, following Completion, the Combined Group’s existing brands and ability to launch new brands. In the United States, television and radio advertisements of cigarettes have been prohibited since 1971, and television and radio advertisements of smokeless tobacco products have been prohibited since 1986. Under the master settlement agreement dated 23 November 1998 between 46 US states, the District of Columbia and five US territories and various tobacco manufacturers, including RJR Tobacco Company, B&W and Lorillard Tobacco (the “MSA”), resolving various state healthcare cost recovery claims, RJR Tobacco Company and SFNTC, cannot use billboard advertising, cartoon characters, sponsorship of certain events, non-tobacco merchandise bearing their brand names and various other advertising and marketing techniques. The MSA also prohibits targeting of youth in advertising, promotion or marketing of tobacco products, including the smokeless tobacco products of RJR Tobacco Company. Although these restrictions were intended to ensure that tobacco advertising was not aimed at young people, some of the restrictions also may limit the ability of the RAI Group and, following Completion the Combined Group, to communicate with adult tobacco consumers in the United States.

US securities laws

As a result of the registration of the BAT Shares with the SEC, BAT will be subject to US securities laws and other US laws and regulations, including the US Foreign Corrupt Practices Act of 1977 (the “FCPA”), which upon Completion will apply to the Combined Group’s worldwide activities and the Sarbanes Oxley Act of 2002 as a foreign private issuer. These regulations are different from the regulations to which BAT is currently subject and therefore pose an increased compliance burden on the BAT Group. While the BAT Group continuously seeks to improve its systems of internal controls and to remedy any weaknesses identified, there can be no assurance that the policies and procedures will be followed at all times or effectively detect and prevent violations of applicable laws, including the FCPA.

Any additional regulations issued by the FDA or any additional US federal, state or local laws could have a material adverse effect on the results of operations, cash flows and financial position of the Combined Group.

 

2.2 As a result of the Proposed Acquisition, the Combined Group’s exposure to risks related to the US cigarette market will increase, which could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group following Completion

Following Completion the Combined Group’s exposure to the US cigarette market and the related commercial risks, will increase (by virtue of BAT’s ownership of 100% of RAI’s equity). The RAI Group is dependent on the US cigarette market, which is expected to continue to decline. The RAI Group’s combustible cigarette brands include and, following Completion, the Combined Group’s US combustible cigarette brands will include, among others, NEWPORT, CAMEL, PALL MALL and NATURAL AMERICAN SPIRIT. For the year ended 31 December 2016, the RAI Group’s sales in the United States attributable to combustible cigarettes represented approximately 89% of its 2016 consolidated net sales. The Combined Group’s sales in the United States attributable to combustible cigarettes would have represented approximately 34% of the Combined Group’s pro forma net sales for the year ended 31 December 2016, assuming the Proposed Acquisition had occurred on 1 January 2016.

 

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The Combined Group’s exposure to the decline of US cigarette consumption will increase. Such consumption has declined for a variety of factors, including, for example, price increases, restrictions on advertising and promotions, smoking prevention campaigns, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of smoking, increased pressure from anti-tobacco groups, and migration to smokeless products. Management Services Associates Inc. (“MSAi”) reported that, on a year-on-year basis, US cigarette shipments declined 2.4% in 2016, 0.1% in 2015 and 3.2% in 2014. US cigarette consumption is expected to continue to decline and any such decline or the transition of adult tobacco consumers away from premium cigarette brands in the US could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group.

In addition, the RAI Group is dependent on premium cigarette brands, such as NEWPORT, with premium brands accounting for approximately 73% of the cigarette volume of subsidiaries of the RAI Group in 2016. As a result, the RAI Group is and, following Completion, the Combined Group will be susceptible to consumer price sensitivities and adverse financial or economic conditions could increase the number of consumers switching to a lower-priced brand.

As a result of increased exposure to the US cigarette market, the Combined Group’s exposure to risks such as the inability to keep up with competitor actions, and the inability to raise prices to compensate for declines in sales volumes and increases in excise taxes will also increase. For more information on risks related to BAT’s increased exposure to the US cigarette market following Completion see, “Completion will result in BAT becoming subject to US regulations which are different from the regulations to which BAT is currently subject. The additional regulations could have an adverse effect on the results of operations, cash flows and financial position of the Combined Group following Completion” set out above.

 

2.3 Following Completion, the Combined Group will be subject to the significant tobacco-related and other litigation which is pending against certain members of the RAI Group that could substantially reduce the Combined Group’s profitability and could severely impair liquidity

There are a number of legal and regulatory actions, proceedings and claims against the RAI Group related to tobacco products pending in a number of jurisdictions, including the United States and Canada, which, following Completion, in addition to the legal and regulatory actions, proceedings and claims against the BAT Group, the Combined Group will be subject to (by virtue of BAT’s ownership of 100% of RAI’s equity). These proceedings comprise claims for personal injury (both individual claims and class actions) and claims for economic loss arising from the treatment of smoking and health-related diseases (such as medical recoupment claims brought by local governments). There are also ongoing proceedings that are not directly related to tobacco products. These various proceedings could give rise to material liability.

On 31 March 2017, there were 288 cases pending against RJR Tobacco Company (including as successor to Lorillard Tobacco in connection with the Lorillard Merger), American Snuff Co., SFNTC, RJR Vapor, RAI, Lorillard Tobacco, other RAI affiliates, and indemnitees, including but not limited to B&W (together, the “Reynolds Defendants”): 271 in the United States and 17 in Canada (not including the approximately 564 individual smoker cases pending in West Virginia state court as a consolidated action, 2,777 Engle Progeny cases, involving approximately 3,570 individual plaintiffs, and 2,352 Broin II cases).

The tobacco-related legal actions range from individual lawsuits to class-actions and other aggregate claim lawsuits. For example, in Engle v. R. J. Reynolds Tobacco Co, involving RJR Tobacco Company and B&W, the Florida Supreme Court issued a ruling that, while determining that the case could not proceed further as a class action, permitted members of the Engle class to file individual claims, including claims for punitive damages, through 11 January 2008. The decision preserved several of the Engle jury findings for use in adjudicating these subsequent individual actions, which are now known as Engle Progeny cases. As at 31 March 2017, RJR Tobacco Company had been served in 2,777 pending Engle Progeny cases filed on behalf of approximately 3,570 individual plaintiffs. Many of these are in active discovery or nearing trial. In all Engle Progeny cases tried to date, a central issue has been the proper use of the preserved Engle findings. RJR Tobacco has argued that the use of the Engle findings to establish individual elements of claims (such as defect, negligence and concealment) is a violation of federal due process. In 2013, both the Florida Supreme Court and the US Court of Appeals for the Eleventh Circuit rejected that argument. The Engle Progeny cases have resulted in increased litigation and trial activity, including an increased number of adverse verdicts, and increased

 

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expenses. Since the beginning of 2014 through 31 March 2017, RJR Tobacco Company and Lorillard Tobacco cumulatively paid $246 million in compensatory and punitive damages and $94.7 million for attorneys’ fees and statutory interest, for a total of $340.7 million, in these cases. In addition, outstanding jury verdicts in favour of the Engle Progeny plaintiffs had been entered against RJR Tobacco Company or Lorillard Tobacco for $197.8 million in compensatory damages (as adjusted) and $220.7 million in punitive damages, a total of $418.6 million. All of these verdicts are in various stages in the appellate process and have been bonded as required by Florida law under the $200 million bond cap passed by the Florida legislature in 2009. Bills are pending in the Florida legislature that would repeal the existing $200 million bond cap. Such a repeal, depending upon the amount of any adverse judgement, could increase the amount RJR Tobacco Company would be required to bond. Although RJR Tobacco Company cannot currently predict when or how much it may be required to bond and pay, RJR Tobacco Company will likely be required to bond and pay additional judgements as the litigation proceeds.

Class-action suits have been filed in a number of states against individual cigarette manufacturers, including B&W, RJR Tobacco Company and RAI, alleging that the use of the terms “lights” and “ultra-lights” constitutes unfair and deceptive trade practices. In addition, several class actions have been filed against SFNTC and RAI asserting that use of the terms “natural”, “additive-free” and “organic” in the product labelling and advertising for SFNTC’s NATURAL AMERICAN SPIRIT cigarette brand violates state disclosure, and deceptive and unfair trade practice, statutes.

Furthermore, the RAI Group is and, following Completion, the Combined Group will be, subject to substantial payment obligations under the MSA and the state settlement agreements with the states of Mississippi, Florida, Texas and Minnesota (the MSA and such settlement agreements, collectively “State Settlement Agreements”). RAI’s operating subsidiaries’ expenses and payments under the State Settlement Agreements for 2016 amounted to $2,727 million in respect of settlement expenses and $3,042 million in respect of settlement cash payments. RAI’s operating subsidiaries’ projected expenses and payments under the State Settlement Agreements for 2017 and 2018, and thereafter, amount to greater than $3,000 million per year in respect of projected settlement expenses and, in respect of projected settlement cash payments, greater than $2,700 million in respect of 2017 and greater than $3,000 million per year in respect of 2018 and thereafter.

In addition, in the United States, B&W is a defendant in a number of product liability cases. The total number of US tobacco product liability cases pending as at 31 March 2017 involving B&W was approximately 4,834 (compared to approximately 4,925 as at 31 December 2016). Since many of these pending cases seek unspecified damages, it is not possible to quantify the total amounts being claimed, but the aggregate amounts involved in such litigation are significant, possibly totalling billions of US dollars. Although the BAT Group currently has the benefit of an indemnity from RJR Tobacco Company with respect to all of the 4,834 cases involving B&W, following Completion this indemnity would be between members of the Combined Group, and as such the Combined Group would not benefit from an indemnification by an external party.

Following Completion, the Combined Group’s consolidated results of operations, cash flows and financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavourable outcome of certain pending or future litigation against the RAI Group or the BAT Group, including through exposure to substantial liabilities as a result of such outcomes. This, in turn, could materially increase costs, including costs associated with bringing proceedings and defending such claims, which includes exposure to adverse costs orders. Any negative publicity resulting from these claims may adversely affect the Combined Group’s reputation following Completion.

 

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PART III

HISTORICAL FINANCIAL INFORMATION OF THE RAI GROUP

Section A: Historical financial information of the RAI Group

The audited consolidated financial statements for the RAI Group for the years ended 31 December 2016, 2015 and 2014, together with the independent audit reports in respect of those financial statements, the audited consolidated financial statements for the RAI Group for the years ended 31 December 2015, 2014 and 2013, together with the independent audit report in respect of those financial statements and the unaudited consolidated financial statements for the RAI Group for the three months ended 31 March 2017, are incorporated by reference from Appendix 2 (RAI’s Financial Statements) of the Prospectus. The financial information relating to the RAI Group in this document and incorporated by reference has been prepared in accordance with US GAAP.

 

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Section B: Unaudited reconciliations of the RAI Group’s historical financial information

 

1. Unaudited reconciliations of the RAI Group’s historical financial information to BAT’s accounting policies

The following unaudited reconciliations summarise the material adjustments which reconcile the RAI Group’s consolidated net income (profit for the period) for the three months ended 31 March 2017 and each of the three years ended 31 December 2016, 2015 and 2014, as well as the balance sheet (total equity) as at 31 March 2017, 31 December 2016, 2015 and 2014, as previously reported by the RAI Group, to estimate those that would have been reported had the RAI Group applied the accounting policies used by the BAT Group in the preparation of its consolidated financial statements for the three months ended 31 March 2017 and the years ended 31 December 2016, 2015 and 2014.

These differences relate to methods for recognition and measurement of the amounts shown in the consolidated financial statements. The reconciliation does not seek to reflect any changes to the judgements made by RAI in preparing the underlying RAI Group financial information and does not reflect any fair value adjustments which the Board will need to make as a result of the Proposed Acquisition or would have made had the Proposed Acquisition happened at any other date during the historical period shown.

The following unaudited reconciliations present the effect of the material differences between the RAI Group’s accounting policies (using US GAAP) and the BAT Group’s accounting policies (using IFRS (EU)); the adjustment to the balance sheet (total equity) is a cumulative adjustment whereas the net income adjustment represents the effect for the accounting period only and therefore does not correspond with the total equity adjustment amount for the corresponding accounting period.

 

1.1 Unaudited reconciliation of the RAI Group’s profit for the period ended 31 March 2017 and the years ended 31 December 2016, 2015 and 2014

 

     For the three
months ended 31
March 2017
   

For the year ended 31 December

 

 
(in $ millions)      2016     2015      2014  
  

 

 

   

 

 

   

 

 

    

 

 

 
Net income for the period attributable to RAI as reported by RAI (US GAAP)1      780       6,073       3,253        1,470  

Adjusted for differences from BAT accounting policies:

         
Inventory – LIFO2      2       (9)       (30)        (1)  
Defined benefit plans3      (21     (72     35        181  
Consolidated profit for the period attributable to RAI under BAT accounting policies (IFRS (EU))      761       5,992       3,258        1,650  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

1 The consolidated profit of the RAI Group for the years ended 31 December 2016, 2015 and 2014 has been extracted without material adjustment from the RAI Group’s consolidated financial statements for each of the respective years included in RAI’s Annual Report on Form 10-K for the year ended 31 December 2016. The consolidated profit of the RAI Group for the three months ended 31 March 2017 has been extracted without material adjustment from the RAI Group’s consolidated financial statements included within RAI’s Quarterly Report on Form 10-Q for the quarterly period ended 31 March 2017.

 

2 Under US GAAP, the RAI Group has historically accounted for the cost of tobacco inventories principally under the last-in, first-out, (“LIFO”) method. The LIFO method of accounting for inventory is not allowed under IFRS (EU) and BAT accounts for these inventories based on the weighted average cost method. Consequently, the RAI Group’s LIFO charge/(gain) to raw materials and consumables used during the year ended 31 December 2016 of $15 million (2015: $50 million; 2014: $2 million; Q1 2017: $(4) million) has been adjusted with a related impact to income taxes of $6 million (2015: $20 million; 2014: $1 million; Q1 2017: $2 million).

 

3 Under US GAAP the expected return on pension plan assets is used to calculate the return component of net periodic benefit costs, with the difference between the actual and expected rate of return recognised as a component of actuarial (gains) losses within accumulated other comprehensive income with subsequent recognition in operating results to the extent the net (gains) losses are in excess of the corridor. Under IFRS (EU) as applied by BAT, net interest cost on defined benefit plans, a component of defined benefit costs, is calculated by applying the discount rate assumption to the net defined benefit liability. The difference between actual return on plan assets and the component of net interest derived from plan assets is recognised in accumulated other comprehensive income as a component of remeasurement gains and losses. IFRS (EU) does not permit recognition of remeasurement gains and losses in profit in current or future periods.

 

  

As a result, employee benefit costs for the year ended 31 December 2016 reflects an adjustment to increase the charge by $80 million (2015: $98 million decrease; 2014: $340 million decrease; Q1 2017: $41 million). This comprises a combination of a debit to net periodic benefit cost of $125 million (2015: $148 million; 2014:

 

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$112 million; Q1 2017: $41 million) and the reversal of the RAI Group’s “mark to market” adjustment to record actuarial gains in excess of corridor amounting to $45 million in 2016 (2015: $246 million; 2014: $452 million; Q1 2017: $nil). The related impact to taxation on ordinary activities is $32 million (2015: $39 million; 2014: $135 million; Q1 2017: $16 million).

 

   Under US GAAP, prior service costs are recognised in accumulated other comprehensive income at the date of the adoption of the plan amendment and then amortised into income. Under IFRS (EU), prior service costs cannot be spread over a future service period but rather are recognised immediately. Accordingly, employee benefit costs for the year ended 31 December 2016 reflects adjustment to increase (decrease) the charge by $39 million (2015: $39 million; 2014: $39 million; Q1 2017: $(8) million) to reverse prior service cost gains which were amortised to income in the period. The related impact to taxation on ordinary activities is $15 million (2015: $15 million; 2014: $15 million; Q1 2017: $4 million).

 

1.2 Unaudited reconciliation of the RAI Group’s consolidated income statement under BAT Group accounting policies and income statement presentation for the year ended 31 December 2016

 

          Reclassifications and US GAAP to IFRS (EU)
adjustments
             
(in millions)   Historical
RAI

(US
GAAP)2
    Reclassifications3     LIFO
Inventories4
    Pensions5,6     Revenue
recognition7
    Adjusted
RAI
(IFRS
(EU))
    Adjusted RAI
(IFRS (EU))8
 
Net sales   $ 12,2771     $ (12,277)     $ -     $ -     $ -     $ -     £ -  
Net sales, related party     226       (226)       -       -       -       -       -  
Revenue     -       12,503       -       -       8       12,511       9,233  
Raw materials and consumables used     -       (4,594)       (15)       -       (8)       (4,617)       (3,407)  
Changes in inventories of finished goods and work in progress     -       (15)       -       -       -       (15)       (11)  
Cost of products sold     (4,841)1       4,841       -       -       -       -       -  
Employee benefit costs     -       (821)       -       (119)       -       (940)       (694)  
Selling, general and administrative expenses     (1,931)       1,931       -       -       -       -       -  
Gain on Divestiture     4,861       (4,861)       -       -       -       -       -  
Depreciation, amortisation and impairment costs     -       (123)       -       -       -       (123)       (91)  
Amortisation expense     (23)       23       -       -       -       -       -  
Other operating income     -       4,861       -       -       -       4,861       3,587  
Other operating expenses     -       (1,242)       -       -       -       (1,242)       (916)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit from operations

    10,569       -       (15)       (119)       -       10,435       7,701  
Interest and debt expense     (626)       626       -       -       -       -       -  
Interest income     8       (8)       -       -       -       -       -  
Other income/expenses, net     (260)       260       -       -       -       -       -  
Net finance     -       (878)       -       -       -       (878)       (648)  
Share of post-tax results of associates and joint ventures     -       -       -       -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before taxation

    9,691       -       (15)       (119)       -       9,557       7,053  
Provision for income taxes     (3,618)       3,618       -       -       -       -       -  
Taxation on ordinary activities     -       (3,618)       6       47       -       (3,565)       (2,631)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit for the year

    6,073       -       (9)       (72)       -       5,992       4,422  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

             
Owners of the parent     6,073       -       (9)       (72)       -       5,992       4,422  
Non-controlling interests     -       -       -       -       -       -       -  

 

1 Excludes duty, excise and other taxes of $4,343 million (£3,205 million).

 

2 The RAI Group’s income statement line items are directly extracted without material adjustment from the RAI Group’s consolidated income statement for the year ended 31 December 2016 as set out within RAI’s Form 10-K. The order of the line items may be different from those in the RAI Group’s consolidated income statement to allow each line to be matched to the presentational format of the BAT Group’s consolidated income statement.

 

3 The classification of certain items presented by the RAI Group under US GAAP has been modified in order to align with the presentation used by BAT under IFRS (EU). Modifications to the RAI Group’s historical income statement presentation include: presentation of “Net sales” and “Net sales, related party” together within revenue; separate presentation of components of cost of sales into raw materials and consumables used, changes in inventories of finished goods and work in progress, employee benefit costs and depreciation, amortisation and impairment costs; separate presentation of components of selling, general and administrative expenses into employee benefit costs, depreciation, amortisation and impairment costs and other operating expenses; presentation of gain on divestiture in other operating income; presentation of amortisation expense and asset impairment charges within depreciation, amortisation and impairment costs; and presentation of interest and debt expense, interest income and other income/expenses (net) within net finance (costs)/income.

 

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4 Under US GAAP, the RAI Group has historically accounted for the cost of tobacco inventories principally under the LIFO method. The LIFO method of accounting for inventory is not allowed under IFRS (EU), and BAT accounts for these inventories based on the weighted average cost method. Consequently, $139 million and the related benefit to raw materials and consumables used of $15 million, have been adjusted with a related impact to provision for income taxes of $6 million. The net impact to retained earnings is $139 million.

 

5 Under US GAAP the expected return on pension plan assets is used to calculate the return component of net periodic benefit costs, with the difference between the actual and expected rate of return recognised as a component of actuarial (gains) losses within accumulated other comprehensive income with subsequent recognition in operating results to the extent the net (gains) losses are in excess of the corridor. Under IFRS (EU) as applied by BAT, net interest cost on defined benefit plans, a component of defined benefit costs, is calculated by applying the discount rate assumption to the net defined benefit liability. The difference between actual return on plan assets and the component of net interest derived from plan assets is recognised in accumulated other comprehensive income as a component of remeasurement gains and losses. IFRS (EU) does not permit recognition of remeasurement gains and losses in profit in current or future periods.

 

     As a result, employee benefit costs for the year ended 31 December 2016 reflects an adjustment to increase the charge by $80 million. This comprises a combination of a debit to net periodic benefit cost of $125 million and the reversal of the RAI Group’s “mark to market” adjustment to record actuarial gains in excess of corridor amounting to $45 million in 2016. The related impact to taxation on ordinary activities is $32 million.

 

6 Under US GAAP, prior service costs are recognised in accumulated other comprehensive income at the date of the adoption of the plan amendment and then amortised into income. Under IFRS (EU), prior service costs cannot be spread over a future service period but rather are recognised immediately. Accordingly, employee benefit costs for the year ended 31 December 2016 reflects an adjustment to increase the charge by $39 million to reverse prior service cost gains which were amortised to income in the period. The related impact to taxation on ordinary activities is $15 million.

 

7 The RAI Group has deferred certain sales transactions as these constitute bill and hold transactions under US GAAP. Under IFRS (EU) as applied by BAT, these transactions are determined to meet the revenue recognition criteria requiring the transfer of risks and rewards to the customer prior to period end and have been recognised accordingly.

 

8 The RAI Group’s presentation currency is USD, while BAT’s presentation currency is GBP. Thus, RAI’s adjusted income statement was translated using an exchange rate of £0.73801/$1, which was the mid-market weighted average rate for the year ended 31 December 2016.

 

1.3 Unaudited reconciliation of the RAI Group’s balance sheet as at 31 March 2017, 31 December 2016, 2015 and 2014

 

     For the three
months ended
31 March 2017
     For the year ended 31 December  
(in $ millions)       2016      2015      2014  
Consolidated total equity as reported by RAI (US GAAP)1      21,706        21,711        18,252        4,522  

Adjusted for differences from BAT accounting policies:

           
Inventory – LIFO2      87        85        94        124  
Consolidated total equity of RAI under BAT accounting policies (IFRS (EU))      21,793        21,796        18,346        4,646  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 The consolidated total equity of the RAI Group as at 31 December 2016, 2015 and 2014 has been extracted without material adjustment from the RAI Group’s consolidated financial statements for each of the respective years included in RAI’s Annual Report on Form 10-K for the year ended 31 December 2016. The consolidated profit of the RAI Group for the three months ended 31 March 2017 has been extracted without material adjustment from the RAI Group’s consolidated financial statements included within RAI’s Quarterly Report on Form 10-Q for the quarterly period ended 31 March 2017.

 

2 Under US GAAP, RAI has historically accounted for the cost of tobacco inventories principally under the LIFO method. The LIFO method of accounting for inventory is not allowed under IFRS (EU), and BAT accounts for these inventories based on the weighted average cost method. Consequently, as at 31 December 2016, $139 million (2015: $154 million; 2014: $204 million; Q1 2017: $143 million) has been adjusted with a related impact to provision for income taxes of $54 million (2015: $60 million; 2014: $80 million; Q1 2017: $56 million). The net impact to retained earnings is $85 million (2015: $94 million; 2014: $124 million; Q1 2017: $87 million).

 

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1.4 Unaudited reconciliation of the RAI Group’s consolidated balance sheet under BAT Group accounting policies and balance sheet presentation as at 31 December 2016

 

          Reclassifications and US GAAP to IFRS (EU)
adjustments
             
(in millions)   Historical
RAI

(US
GAAP)1
    Reclassifications2     LIFO
Inventories3
    Pensions4     Revenue
recognition5
    Adjusted
RAI

(IFRS
(EU))
    Adjusted RAI
(IFRS (EU))
 

Assets

             

Non-current assets

             
Goodwill     $ 15,992       $ (15,992)       $ -       $ -       $ -       $ -       £ -  
Trademarks and other intangible assets, net of accumulated amortisation     29,444       (29,444)       -       -       -       -       -  
Intangible assets     -       45,463       -       -       -       45,463       36,782  
Property, plant and equipment, net     1,348       (1,348)       -       -       -       -       -  
Property, plant and equipment     -       1,321       -       -       -       1,321       1,069  
Investments in associates and joint ventures     -       -       -       -       -       -       -  
Retirement benefit assets     -       -       -       -       -       -       -  
Deferred tax assets     -       -       -       -       -       -       -  
Other assets and deferred charges     73       (73)       -       -       -       -       -  
Trade and other receivables     -       73       -       -       -       73       59  
Available-for-sale investments     -       -       -       -       -       -       -  
Derivative financial instruments     -       -       -       -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current assets

    46,857       -       -       -       -       46,857       37,910  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current assets

             
Inventories     1,645       -       139       -       (25)       1,759       1,423  
Income tax receivable     -       -       -       -       -       -       -  
Accounts receivable     66       (66)       -       -       -       -       -  
Accounts receivable, related party     113       (113)       -       -       -       -       -  
Other receivables     10       (10)       -       -       -       -       -  
Other current assets     353       (353)       -       -       -       -       -  
Trade and other receivables     -       542       -       -       -       542       439  
Available-for-sale instruments     -       -       -       -       -       -       -  
Derivative financial instruments     -       -       -       -       -       -       -  
Deferred income taxes, net     -       -       -       -       -       -       -  
Cash and cash equivalents     2,051       -       -       -       -       2,051       1,659  
Assets classified as held-for-sale     -       -       -       -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    4,238       -       139       -       (25)       4,352       3,521  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    51,095       -       139       -       (25)       51,209       41,431  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

             

Capital and reserves

             
Share capital     -       -       -       -       -       -       -  
Paid-in capital     18,285       (18,285)       -       -       -       -       -  
Share premium, capital redemption and merger reserves     -       18,285       -       -       -       18,285       14,794  
Accumulated other comprehensive loss     (314)       314       -       -       -       -       -  
Other reserves     -       (314)       -       88       -       (226)       (183)  
Retained earnings     3,740       -       85       (88)       -       3,737       3,023  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Owners of the parent     21,711       -       85       -       -       21,796       17,634  
Non-controlling interests     -       -       -       -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    21,711       -       85       -       -       21,796       17,634  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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4

        Reclassifications and US GAAP to IFRS (EU)
adjustments
             
(in millions)   Historical
RAI

(US
GAAP)1
    Reclassifications2     LIFO
Inventories3
    Pensions4     Revenue
recognition5
    Adjusted
RAI

(IFRS
(EU))
    Adjusted RAI
(IFRS (EU))
 

Liabilities

 

             

Non-current liabilities

             
Long-term debt (less current maturities)     12,664       (12,664)       -       -       -       -       -  
Borrowings     -       12,664       -       -       -       12,664       10,246  
Long-term retirement benefits (less current portion)     1,869       (1,869)       -       -       -       -       -  
Retirement benefit liabilities     -       1,869       -       -       -       1,869       1,512  
Long-term deferred income taxes, net     9,607       (9,607)       -       -       -       -       -  
Deferred tax liabilities     -       9,607       54       -       -       9,661       7,817  
Long-term deferred revenue, related party     39       (39)       -       -       -       -       -  
Other non-current liabilities     220       (220)       -       -       -       -       -  
Other provisions for liabilities and charges     -       39       -       -       (25)       14       11  
Trade and other payables     -       82       -       -       -       82       66  
Derivative financial instruments     -       -       -       -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current liabilities

    24,399       (138)       54       -       (25)       24,290       19,652  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current Liabilities

             
Current maturities of long-term debt     501       (501)       -       -       -       -       -  
Borrowings     -       501       -       -       -       501       405  
Income tax payable     -       -       -       -       -       -       -  
Tobacco settlement accruals     2,498       (2,498)       -       -       -       -       -  
Other current liabilities     1,036       (1,036)       -       -       -       -       -  
Other provisions for liabilities and charges     -       2,636       -       -       -       2,636       2,133  
Accounts payable     221       (221)       -       -       -       -       -  
Due to related party     7       (7)       -       -       -       -       -  
Deferred revenue, related party     66       (66)       -       -       -       -       -  
Dividends payable on RAI Shares     656       (656)       -       -       -       -       -  
Trade and other payables     -       1,986       -       -       -       1,986       1,607  
Derivative financial instruments     -       -       -       -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    4,985       138       -       -       -       5,123       4,145  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity and liabilities

    51,095       -       139       -       (25)       51,209       41,431  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 The RAI Group’s balance sheet line items are directly extracted without material adjustment from the RAI Group’s consolidated balance sheet as at 31 December 2016 as set out in RAI’s Annual Report on Form 10-K for the year ended 31 December 2016. The order of the line items may be different from those in the RAI Group’s consolidated balance sheet to allow each line to be matched to the presentational format of the BAT Group’s consolidated balance sheet.

 

2 The classification of certain items presented by the RAI Group under US GAAP has been modified in order to align with the presentation used by BAT under IFRS (EU). Modification to RAI’s historical balance sheet presentation include: presentation of goodwill within intangible assets; presentation of trademarks and other intangible assets, net of accumulated amortization, within intangible assets; presentation of other assets and deferred charges, other receivables, accounts receivable, accounts receivable (related party) and other current assets together within trade and other receivables (current and non-current as applicable); presentation of tobacco settlement accruals, other current liabilities and liabilities for uncertain tax benefits together within other provisions for liabilities and charges (current); presentation of liabilities for uncertain tax benefits from other noncurrent liabilities to other provisions for liabilities and charges (current); and presentation of accounts payable, due to related party, deferred revenue related party and dividends payable on common stock together within other provisions for liabilities and charges (non-current).

 

3 Under US GAAP, RAI has historically accounted for the cost of tobacco inventories principally under the LIFO method. The LIFO method of accounting for inventory is not allowed under IFRS (EU), and BAT accounts for these inventories based on the weighted average cost method. Consequently, $139 million has been adjusted with a related impact to provision for income taxes of $54 million. The net impact to retained earnings is $85 million.

 

4

Under US GAAP, prior service costs are recognised in accumulated other comprehensive income at the date of the adoption of the plan amendment and then amortised into income. Under IFRS (EU), prior service costs cannot be spread over a future service period but rather are recognised immediately. Accordingly, accumulated prior

 

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service cost gains of $88 million (net of tax) recorded in accumulated other comprehensive income relating to periods prior to and including 2016 have been reclassified to retained earnings.

 

5 RAI has deferred certain sales transactions as these constitute bill and hold transactions under US GAAP. Under IFRS (EU) as applied by BAT, these transactions are determined to meet the revenue recognition criteria requiring the transfer of risks and rewards to the customer prior to period end and have been recognised accordingly.

 

6 RAI’s presentation currency is USD, while BAT’s presentation currency is GBP. Thus, RAI’s adjusted balance sheet was translated using an exchange rate of £0.80906/$1, which was the spot rate at 31 December 2016.

 

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2. Accountant’s report on the unaudited reconciliations of the consolidated historical financial information of the RAI Group

LOGO

The Directors

British American Tobacco p.l.c.

Globe House

4 Temple Place

London WC2R 2PG

14 June 2017

Ladies and Gentlemen

British American Tobacco p.l.c.: proposed acquisition of Reynolds American Inc.

We report on the reconciliation of the consolidated profit for each of the years in the three year period ended 31 December 2016, and the consolidated balance sheet as at 31 December 2014, 31 December 2015 and 31 December 2016, (together ‘the financial information’), as previously reported in the financial statements of Reynolds American Inc. prepared under United States Generally Accepted Accounting Principles, showing the adjustments necessary to restate it on the basis of the accounting policies used by British American Tobacco p.l.c. in preparing its latest annual accounts (the ‘reconciliation’), set out in Part III of the Class 1 circular of British American Tobacco p.l.c. relating to the acquisition of Reynolds American Inc. dated 14 June 2017 (the ‘Circular’). This report is required by Listing Rule 13.5.27R(2)(a) of the Financial Conduct Authority and is given for the purpose of complying with that Listing Rule and for no other purpose.

Responsibility

It is the responsibility of the directors of British American Tobacco p.l.c. to prepare the reconciliation in accordance with Listing Rule 13.5.27R(2)(a) of the Financial Conduct Authority.

It is our responsibility to form an opinion, as required by Listing Rule 13.5.27R(2)(a), as to whether:

 

(a) the reconciliation has been properly compiled on the basis stated; and

 

(b) the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies,

and to report that opinion to you.

The reconciliation is based on the audited balance sheets as at 31 December 2016, 2015 and 2014 and income statements for the years then ended of Reynolds American Inc. which were the responsibility of the directors of Reynolds American Inc. and were audited by another firm of accountants. We do not accept any responsibility for any of the historical financial statements of Reynolds American Inc., nor do we express any opinion on those financial statements.

Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to Ordinary shareholders as a result of the inclusion of this report in the Circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the Circular.

Basis of Opinion

We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of checking whether the unadjusted financial information of Reynolds American Inc. has been accurately extracted from an appropriate source, assessing whether all adjustments necessary for the purpose of presenting the financial information on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies have been made, examination of evidence supporting the adjustments in the reconciliation and checking the arithmetical accuracy of the calculations within the reconciliation.

 

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We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the reconciliation has been properly compiled on the basis stated and that the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies.

Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America or other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.

Opinion

In our opinion

 

(a) the reconciliation has been properly compiled on the basis stated; and

 

(b) the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies.

Yours faithfully

KPMG LLP

 

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Section C: Historical financial information of the Lorillard Group

 

1. Historical financial information of the Lorillard Group for the year ended 31 December 2014

The audited consolidated financial statements for the Lorillard Group for the year ended 31 December 2014, together with the independent audit report in respect of those financial statements, are incorporated by reference from Part A of Appendix 3 (Lorillard’s Financial Statements) of the Prospectus. The financial information relating to the Lorillard Group in this document and incorporated by reference has been prepared in accordance with US GAAP.

 

2. Historical financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015

The financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015 is included at Appendix 2 (Lorillard’s Financial Statements) of this document.

 

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3. Accountant’s report on the historical financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015

LOGO

The Directors

British American Tobacco p.l.c.

Globe House

4 Temple Place

London WC2R 2PG

14 June 2017

Ladies and Gentlemen

British American Tobacco p.l.c.: proposed acquisition of Reynolds American Inc. and its historical acquisition of Lorillard Inc.

We report on the financial information set out on pages 96 to 144 of the Class 1 circular dated 14 June 2017 for the period from 1 January 2015 to 11 June 2015. This financial information has been prepared for inclusion in the Class 1 circular on the basis of the accounting policies set out in note 1. This report is required by paragraph 13.5.21R of the Listing Rules and is given for the purpose of complying with that paragraph and for no other purpose.

Responsibilities

The Directors of British American Tobacco p.l.c. are responsible for preparing the financial information on the basis of preparation set out in note 1 to the financial information and in accordance with United States Generally Accepted Accounting Principles.

It is our responsibility to form an opinion on the financial information and to report our opinion to you.

Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to Ordinary shareholders as a result of the inclusion of this report in the Class 1 circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the Class 1 circular.

Basis of Opinion

We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of the significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed.

We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error.

Opinion

In our opinion, the financial information gives, for the purposes of the Class 1 circular dated 14 June 2017, a true and fair view of the state of affairs of Lorillard Inc. as at 11 June 2015 and of its profits, cash flows and changes in equity for the period 1 January to 11 June 2015 in accordance with the basis of preparation set out in note 1 and in accordance with United States Generally Accepted Accounting Principles.

Yours faithfully

KPMG LLP

 

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Section D: Unaudited reconciliations of the Lorillard Group’s historical financial information

 

1. Unaudited reconciliations of the Lorillard Group’s historical financial information for the period from 1 January 2015 to 11 June 2015 and the year ended 31 December 2014 to BAT’s accounting policies

The following unaudited reconciliations summarise the material adjustments which reconcile the Lorillard Group’s income for the year ended 31 December 2014 and the period from 1 January 2015 to 11 June 2015; as well as the balance sheet (shareholders’ deficit) as at 31 December 2014 and 11 June 2015, and to estimates of those that would have been reported had the Lorillard Group applied the accounting policies used by the BAT Group in the preparation of its consolidated financial statements for the year ended 31 December 2016.

These differences relate to methods for recognition and measurement of the amounts shown in the consolidated financial statements. The reconciliation does not seek to reflect any changes to the judgements made by Lorillard in preparing the underlying Lorillard Group financial information and does not reflect any fair value adjustments made following the Lorillard Merger or any fair value adjustments which the BAT Board will need to make as a result of the Proposed Acquisition or would have made had the Proposed Acquisition happened at any other date during the historical period shown.

The following unaudited reconciliations present the effect of the material differences between the Lorillard Group’s accounting policies using US GAAP and the BAT Group’s accounting policies using IFRS (EU); the adjustment to the balance sheet (shareholders’ deficit) is a cumulative adjustment whereas the net income adjustment represents the effect for the accounting period only and therefore does not correspond with the total equity adjustment amount for the corresponding accounting period.

 

1.1 Unaudited reconciliation of the Lorillard Group’s net income for the period from 1 January 2015 to 11 June 2015 and the year ended 31 December 2014

 

($ millions)    1 January 2015 to 11 June
2015
     For the year ended
31 December 2014
 
  

 

 

    

 

 

 
Net Income for the period attributable to Lorillard as reported by Lorillard (US GAAP)1      534        1,187  
Adjusted for differences from BAT accounting policies:      
Inventory – LIFO2      24        11  
Defined benefit plans3      (4)        (21)  
Consolidated profit for the period attributable to Lorillard under BAT accounting policies (IFRS (EU))      554        1,177  
  

 

 

    

 

 

 

 

1 The net income of the Lorillard Group for the year ended 31 December 2014 has been extracted without material adjustment from the Lorillard Group’s consolidated financial statements incorporated by reference from Part A of Appendix 3 (Lorillard’s Financial Statements) of the Prospectus. The net income of the Lorillard Group for the period from 1 January 2015 to 11 June 2015 has been extracted without material adjustment from Appendix 2 of this document.

 

2 Under US GAAP, the Lorillard Group has historically accounted for the cost of tobacco inventories principally under the LIFO method. The LIFO method of accounting for inventory is not allowed under IFRS (EU) and BAT accounts for these inventories based on the weighted average cost method. Consequently, the Lorillard Group’s LIFO charge to raw materials and consumables used during the year ended 31 December 2014 of $19 million (1 January 2015 to 11 June 2015: $40 million) has been adjusted with a related impact to income taxes of $8 million (1 January 2015 to 11 June 2015: $16 million).

 

3 Under US GAAP, the expected return on pension plan assets is used to calculate the return component of net periodic benefit costs, with the difference between the actual and expected rate of return recognised as a component of actuarial (gains) losses within accumulated other comprehensive income with subsequent recognition in operating results to the extent the net (gains) losses are in excess of the corridor. Under IFRS (EU) as applied by BAT, net interest cost on defined benefit plans, a component of defined benefit costs, is calculated by applying the discount rate assumption to the net defined benefit liability. The difference between actual return on plan assets and the component of net interest derived from plan assets is recognised in accumulated other comprehensive income as a component of remeasurement gains and losses. IFRS (EU) does not permit recognition of remeasurement gains and losses in profit in current or future periods.

 

     As a result, employee benefit costs for the year ended 31 December 2014 reflects an adjustment to increase the charge by $35 million (1 January 2015 to 11 June 2015: $6 million). This consists of an increase in net period benefit costs of $43 million (1 January 2015 to 11 June 2015: $18 million) and the reversal of amortisation of actuarial losses of $8 million in 2014 (1 January 2015 to 11 June 2015: $12 million). The related impact to taxation on ordinary activities is $14 million (1 January 2015 to 11 June 2015: $2 million).

 

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1.2 Unaudited reconciliation of the Lorillard Group’s balance sheet as at 11 June 2015 and 31 December 2014

 

($ millions)    As at 11 June 2015      As at 31 December 2014  
  

 

 

    

 

 

 
Consolidated total shareholders’ deficit as reported by Lorillard (US GAAP)1      (2,074)        (2,182)  

Adjusted for differences from BAT accounting policies:

     
Inventory – LIFO2      195        171  
Consolidated net assets of Lorillard under BAT accounting policies (IFRS (EU))      (1,879)        (2,011)  
  

 

 

    

 

 

 

 

1 The consolidated total shareholders’ deficit of the Lorillard Group as at 31 December 2014 has been extracted without material adjustment from the Lorillard Group’s consolidated financial statements incorporated by reference from Part A of Appendix 3 (Lorillard’s Financial Statements) of the Prospectus. The consolidated total shareholders’ deficit of the Lorillard Group as at 11 June 2015 has been extracted without material adjustment from Lorillard Group’s consolidated financial statements included within Appendix 2 of this document.

 

2 Under US GAAP, the Lorillard Group has historically accounted for the cost of tobacco inventories principally under the LIFO method. The LIFO method of accounting for inventory is not allowed under IFRS (EU) and BAT accounts for these inventories based on the weighted average cost method. Consequently, the Lorillard Group’s LIFO reserve as at 31 December 2014 of $283 million (11 June 2015: $323 million) has been adjusted with a related impact to provision for income taxes of $112 million (1 January 2015 to 11 June 2015: $128 million). The net impact to retained earnings is $171 million (11 June 2015: $195 million).

 

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2. Accountant’s report on the unaudited reconciliations of the consolidated historical financial information of the Lorillard Group for the year ended 31 December 2014

LOGO

The Directors

British American Tobacco p.l.c.

Globe House

4 Temple Place

London WC2R 2PG

14 June 2017

Ladies and Gentlemen

British American Tobacco p.l.c.: proposed acquisition of Reynolds American Inc. and its historical acquisition of Lorillard Inc.

We report on the reconciliation of the consolidated income statement for the year period ended 31 December 2014, and of the consolidated balance sheet as at 31 December 2014, (together ‘the financial information’), as previously reported in the financial statements of Lorillard Inc. prepared under United States Generally Accepted Accounting Principles, showing the adjustments necessary to restate it on the basis of the accounting policies used by British American Tobacco p.l.c. in preparing its latest annual accounts (the ‘reconciliation’), set out in Part III of the Class 1 circular of British American Tobacco p.l.c. dated 14 June 2017. This report is required by Listing Rule 13.5.27R(2)(a) of the Financial Conduct Authority and is given for the purpose of complying with that Listing Rule and for no other purpose.

Responsibility

It is the responsibility of the directors of British American Tobacco p.l.c. (‘the Directors’) to prepare the reconciliation in accordance with Listing Rule 13.5.27R(2)(a) of the Financial Conduct Authority.

It is our responsibility to form an opinion, as required by Listing Rule 13.5.27R(2)(a), as to whether:

 

(a) the reconciliation has been properly compiled on the basis stated; and

 

(b) the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies,

and to report that opinion to you.

The reconciliation is based on the audited balance sheet as at 31 December 2014 and income statement for the year then ended of Lorillard Inc. which were the responsibility of the directors of Lorillard Inc. and were audited by another firm of accountants. We do not accept any responsibility for any of the historical financial statements of Lorillard Inc., nor do we express any opinion on those financial statements.

Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to Ordinary shareholders as a result of the inclusion of this report in the Class 1 circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the Class 1 circular.

Basis of Opinion

We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of checking whether the unadjusted financial information of Lorillard Inc. has been accurately extracted from an appropriate source, assessing whether all adjustments necessary for the purpose of presenting the financial information on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies have been made, examination of evidence supporting the adjustments in the reconciliation and checking the arithmetical accuracy of the calculations within the reconciliation.

 

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We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the reconciliation has been properly compiled on the basis stated and that the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies.

Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.

Opinion

In our opinion

 

(a) the reconciliation has been properly compiled on the basis stated; and

 

(b) the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies.

Yours faithfully,

KPMG LLP

 

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3. Accountant’s report on the unaudited reconciliations of the consolidated historical financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015

LOGO

The Directors

British American Tobacco p.l.c.

Globe House

4 Temple Place

London WC2R 2PG

14 June 2017

Ladies and Gentlemen

British American Tobacco p.l.c.: proposed acquisition of Reynolds American Inc. and its historical acquisition of Lorillard Inc.

We report on the reconciliation of the consolidated income statement for the period from 1 January 2015 to 11 June 2015, and of the consolidated balance sheet as at 11 June 2015, (together ‘the financial information’), as set out in Section D of Part III of the Class 1 circular of British American Tobacco p.l.c. dated 14 June 2017 prepared under United States Generally Accepted Accounting Principles, showing the adjustments necessary to restate it on the basis of the accounting policies used by British American Tobacco p.l.c. in preparing its latest annual accounts (the ‘reconciliation’), set out in Part III of the Class 1 circular of British American Tobacco p.l.c. dated 14 June 2017. This report is required by Listing Rule 13.5.27R(2)(a) of the Financial Conduct Authority and is given for the purpose of complying with that Listing Rule and for no other purpose.

Responsibility

It is the responsibility of the directors of British American Tobacco p.l.c. (‘the Directors’) to prepare the reconciliation in accordance with Listing Rule 13.5.27R(2)(a) of the Financial Conduct Authority.

It is our responsibility to form an opinion, as required by Listing Rule 13.5.27R(2)(a), as to whether:

 

(a) the reconciliation has been properly compiled on the basis stated; and

 

(b) the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies,

and to report that opinion to you.

Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to Ordinary shareholders as a result of the inclusion of this report in the Class 1 circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the Class 1 circular.

Basis of Opinion

We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of checking whether the unadjusted financial information of Lorillard Inc. has been accurately extracted from an appropriate source, assessing whether all adjustments necessary for the purpose of presenting the financial information on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies have been made, examination of evidence supporting the adjustments in the reconciliation and checking the arithmetical accuracy of the calculations within the reconciliation.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the reconciliation has been properly compiled on the basis stated and that the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies.

 

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Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.

Opinion

In our opinion

 

(a) the reconciliation has been properly compiled on the basis stated; and

 

(b) the adjustments are appropriate for the purpose of presenting the financial information (as adjusted) on a basis consistent in all material respects with British American Tobacco p.l.c.’s accounting policies.

Yours faithfully

KPMG LLP

 

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PART IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE COMBINED GROUP

Section A: Unaudited Pro Forma Financial Information for the Combined Group

The unaudited pro forma income statement for the year ended 31 December 2016 and the unaudited pro forma balance sheet as at 31 December 2016 for the Combined Group set out in this Part IV (together the “Unaudited Pro Forma Financial Information”) have been prepared on the basis of the notes set out below to illustrate the effect of the Proposed Acquisition and the related financing on the income statement of the BAT Group as if it had occurred on 1 January 2016, and on the balance sheet of the BAT Group as if it had occurred on 31 December 2016.

The Unaudited Pro Forma Financial Information has been prepared in accordance with Annex II of the Prospectus Directive and in a manner consistent with the accounting policies adopted by the BAT Group in preparing the audited consolidated financial statements for the year ended 31 December 2016.

This Unaudited Pro Forma Financial Information has been prepared for illustrative purposes only and, because of its nature, addresses a hypothetical situation and therefore does not represent the BAT Group’s or the RAI Group’s actual financial position or results. It does not purport to represent what the Combined Group’s financial position actually would have been if the Proposed Acquisition and the related financing had been completed on the dates indicated, nor is it indicative of the results that may or may not be expected to be achieved in the future.

The Unaudited Pro Forma Financial Information does not constitute a statutory account within the meaning of section 434 of the Companies Act 2006. Prospective investors should read the whole of this document and not rely solely on the summarised financial information contained in this Part IV.

 

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1. Unaudited pro forma income statement relating to the Combined Group for the year ended 31 December 2016 giving effect to the Proposed Acquisition

 

(in £ millions, except as otherwise noted)               Pro forma adjustments                    
  Historical
BAT

(IFRS)
    RAI
(IFRS)
    Financing     Proposed
Acquisition
    Notes     Total pro
forma
combined
       
  Note 2     Note 3     Note 4     Note 5                    

Revenue

    14,751       9,233       -       (182)       5(c)       23,802    
Raw materials and consumables used     (3,777)       (3,407)       -       (294)1       5(b)(6), 5(c)       (7,478)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
Changes in inventories of finished goods and work in progress     44       (11)       -       -         33    

Employee benefit costs

    (2,274)       (694)       -       (15)       5(b)(4)       (2,983)    
Depreciation, amortisation and impairment costs     (607)       (91)       -       (58)       5(b)(7)       (756)    

Gain on step acquisition

    -       -       -       23,424       5(b)(11)       23,424    

Other operating income

    176       3,587       -       (9)       5(c)       3,754    

Other operating expenses

    (3,658)       (916)       -       (138)2       5(a), 5(c)       (4,712)    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Profit from operations

    4,655       7,701       -       22,728         35,084    

Net finance (costs)/income

    (637)       (648)       (361)3       46       4(b), 5(b)(5)       (1,600)    

Share of post-tax results of associates and joint ventures

    2,227       -       -       (1,880)       5(b)(11)       347    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Profit before taxation

    6,245       7,053       (361)       20,894         33,831    

Taxation

    (1,406)       (2,631)       101       (7,955)4      

5(a),

5(b)(4),

5(b)(5),

5(b)(6),

5(b)(7),

5(b)(11)

 

 

 

 

 

    (11,891)    

Profit for the year

    4,839       4,422       (260)       12,939         21,940    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
Attributable to:              

Owners of the parent

    4,648       4,422       (260)       12,939         21,749    

Non-controlling interests

    191       -       -       -         191    
    4,839       4,422       (260)       12,939         21,940    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
Earnings per share              

Basic (pence)

    250.2               957.3       (5)  

Diluted (pence)

    249.2               953.0       (5)  
Weighted average shares outstanding, in millions of shares              

Basic

    1,858           434         2,292       (5)  

Diluted

    1,865           437         2,302       (5)  

 

1 Includes £(476) million recognised in respect of the fair value uplift to the RAI Group’s inventory and £182 million of intercompany eliminations. See notes 5(b)(6) and 5(c) respectively below for further details.

 

2 Includes £(211) million of incremental transaction costs and £73 million of intercompany eliminations. See notes 5(a) and 5(c) respectively below for further details.

 

3 Includes an adjustment to interest expenses of £(356) million and a £(5) million adjustment in respect of facility fees to be incurred with respect to Revolving Facility A. See note 4(b) for further details.

 

4 Includes £47 million in respect of the tax impact of transaction costs, £6 million in respect of the tax impact of additional compensation expenses relating to post-combination services, £(18) million in respect of the tax impact of lower interest expenses relating to the step-up in fair value of existing RAI Group debt, £(3) million in respect of the tax impact of the elimination of debt issuance costs, £188 million in respect of the tax impact of the unwind of the fair value uplift to the RAI Group’s inventory, £23 million in respect of the tax impact of amortisation of intangible assets recognised on acquisition and £(8,198) million in respect of the tax impact of the gain on step acquisition. See notes 5(a), 5(b)(4), 5(b)(5), 5(b)(6), 5(b)(7) and 5(b)(11) respectively below for further details.

 

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2. Unaudited pro forma balance sheet relating to the Combined Group

 

(in £ millions, except as otherwise
noted)
              Pro forma adjustments        
  Historical
BAT (IFRS)
    RAI (IFRS)     Financing     Proposed
Acquisition
          Total pro forma
combined
 
          Notes    
Assets   Note 2     Note 3     Note 4     Note 5              
Non-current assets            

5(a)

5(b)(7)

 

 

 

Intangible assets

    12,117       36,782       -       76,7791       5(b)(10)       125,678  

Property, plant and equipment

    3,661       1,069       -       -         4,730  

Investments in associates and joint ventures

    9,507       -       -       (8,051)       5(b)(11)       1,456  

Retirement benefit assets

    455       -       -       -         455  

Deferred tax assets

    436       -       -       -         436  

Trade and other receivables

    599       59       -       -         658  

Available-for-sale investments

    43       -       -       -         43  

Derivative financial instruments

    596       -       -       -         596  
Total non-current assets     27,414       37,910       -       68,728         134,052  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
Current assets            

Inventories

    5,793       1,423       -       476       5(b)(6)       7,692  

Income tax receivable

    69       -       -       -         69  

Trade and other receivables

    3,884       439       -       (98)       5(c)       4,225  

Available-for-sale investments

    15       -       -       -         15  

Derivative financial instruments

    375       -       -       -         375  

Cash and cash equivalents

    2,204       1,659       20,169       (19,350)2      
4(a), 5(a)
5(b)
 
 
    4,682  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
    12,340       3,521       20,169       (18,972)         17,058  

Assets classified as held-for-sale

    19       -       -       -         19  
Total current assets     12,359       3,521       20,169       (18,972)         17,077  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
Total assets     39,773       41,431       20,169       49,756         151,129  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
Equity      
Capital and reserves      

Share capital

    507       -       -       108       5(d)       615  

Share premium, capital redemption and merger reserves

    3,931       14,794       -       9,172       5(d)       27,897  

Other reserves

    413       (183)       -       183       5(d)       413  

Retained earnings

    3,331       3,023       -       20,367       5(d)       26,721  
Owners of the parent     8,182       17,634       -       29,830         55,646  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Non-controlling interests

    224       -       -       -         224  
Total equity     8,406       17,634       -       29,830         55,870  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
Liabilities          
Non-current liabilities          

Borrowings

    16,488       10,246       8,056       952       4(a), 5(b)(5)       35,742  

Retirement benefit liabilities

    826       1,512       -       -         2,338  

Deferred tax liabilities

    652       7,817       -       19,134       5(b)(8)       27,603  

Other provisions for liabilities and charges

    386       11       -       (31)       5(c)       366  

Trade and other payables

    1,040       66       -           1,106  

Derivative financial instruments

    119       -       -       -         119  
Total non-current liabilities     19,511       19,652       8,056       20,055         67,274  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
Current liabilities            

Borrowings

    3,007       405       12,113       2       4(a), 5(b)(5)       15,527  

Income tax payable

    558       -       -       -         558  

Other provisions for liabilities and charges

    407       2,133       -       (33)       5(c)       2,507  

Trade and other payables

    7,335       1,607       -       (98)       5(c)       8,844  

Derivative financial instruments

    549       -       -       -         549  
Total current liabilities     11,856       4,145       12,113       (129)         27,985  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
Total equity and liabilities     39,773       41,431       20,169       49,756         151,129  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

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1 Includes an adjustment to increase intangible assets by £69 million in respect of transaction costs to be paid by RAI pre-Completion, a net adjustment to increase intangible assets by £47,549 million to reflect the fair value of intangible assets acquired with RAI and an adjustment to increase intangible assets by £29,161 million to reflect the fair value of goodwill acquired with RAI. See notes 5(a), 5(b)(7) and 5(b)(10) respectively below for further details.

 

2 Includes a reduction in cash and cash equivalents of £(167) million in respect of transaction costs and of £(19,183) million in respect of cash consideration paid for the Proposed Acquisition. See notes 5(a) and 5(b) respectively below for further details.

Notes to the Unaudited Pro Forma Financial Information

Note 1: Basis of presentation

The Unaudited Pro Forma Financial Information set forth herein is based upon the BAT Group’s consolidated financial statements and the RAI Group’s consolidated financial statements and has been prepared to illustrate the effects of the Proposed Acquisition, including the financing structure established to fund the Proposed Acquisition, as if it had occurred on 1 January 2016 in respect of the Unaudited Pro Forma Income Statement, and as if it had occurred on 31 December 2016 in respect of the unaudited pro forma balance sheet (the “Unaudited Pro Forma Balance Sheet”). The Unaudited Pro Forma Financial Information is presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations that would have been realised had the Proposed Acquisition occurred as at the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the Combined Group will experience after Completion.

The Proposed Acquisition will be accounted for as a business combination using the acquisition method of accounting in accordance with IFRS (EU) under IFRS (EU) 3 which requires that one of the two companies in the Proposed Acquisition be designated as the acquirer for accounting purposes based on the evidence available. BAT will be treated as the accounting acquirer, and accordingly, the RAI Group assets acquired and liabilities assumed have been adjusted based on preliminary estimates of fair value. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed will be recognised as goodwill. The detailed valuation studies necessary to arrive at required estimates of fair values of the assets acquired and liabilities assumed from the RAI Group in the Proposed Acquisition have not been completed. Significant assets and liabilities that are subject to preparation and completion of valuation studies to determine appropriate fair value adjustments include property, plant and equipment, identifiable intangible assets and debt obligations. Changes to the fair values of these assets and liabilities will also result in changes to goodwill and deferred income taxes. The actual fair values will be determined after Completion and may vary materially from these preliminary estimates.

Pro forma adjustments reflected in the Unaudited Pro Forma Financial Information are based on items that are factually supportable and directly attributable to the Proposed Acquisition. The Unaudited Pro Forma Financial Information does not reflect the cost of any integration activities or benefits from the Proposed Acquisition, including potential synergies that may be generated in future periods.

The estimated income tax impacts of the pre-tax adjustments that are reflected in the Unaudited Pro Forma Financial Information are calculated using an estimated blended statutory rate, which is based on preliminary assumptions related to the jurisdictions in which the income (expense) adjustments will be recorded. The estimated blended statutory rate and the effective tax rate of the Combined Group could be significantly different depending on the post-transaction activities and geographical mix of profit before taxes.

The RAI Group’s presentation currency is US dollars, while the BAT Group’s presentation currency is pound sterling. The BAT Group has used exchange rates of £0.73801/$1 and £0.80906/$1, being the mid-market weighted average rate for the year ended 31 December 2016 and the spot rate at 31 December 2016, respectively, to translate the RAI Group’s consolidated income statement and balance sheet, respectively, and all associated financing and acquisition adjustments. These exchange rates may differ from future exchange rates which would have an impact on the Unaudited Pro Forma Financial Information, and would also impact purchase accounting upon Completion. As an example, using the closing exchange rate at 12 June 2017 of £0.78976/$1 would increase the translated amounts of net earnings attributable to BAT by £310 million and decrease RAI’s total assets by £986 million, each as presented in Note 3.

 

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Note 2: BAT’s financial information

BAT’s financial information as at and for the year ended 31 December 2016 has been extracted without material adjustment from BAT’s published financial information for the year ended 31 December 2016.

Note 3: Adjustments to the RAI Group’s financial statements

The RAI Group’s IFRS (EU) financial information for the year ended 31 December 2016 has been extracted without material adjustment from Section B of the Part III (Historical Financial Information of the RAI Group) of this Circular.

Note 4: Pro forma adjustments related to financing

 

(a) Sources of funding

The Acquisition Facility comprises four credit facilities as set out in paragraph 11 of Part I (Letter from the Chairman) of this Circular.

The Acquisition Facility bears interest at a rate per annum equal to LIBOR (or in the case of euro-denominated borrowings, EURIBOR) plus the applicable margin which, based on the BAT Group’s current ratings as assessed by Standard & Poor’s Ratings Services and Moody’s Investors Service, are as follows: (1) Facility A: between 0.3625% and 1.5625% per annum based on the applicable borrowing period; (2) Facility B: between 0.4125% and 2.2125% per annum based on the applicable borrowing period; (3) Facility C: 0.70% per annum; and (4) Facility D: 0.80% per annum. These rates are subject to adjustments in accordance with the terms of the Acquisition Facility based on the applicable credit ratings assigned to the BAT Group. If the LIBOR or EURIBOR rate is below zero, such rate shall be deemed to be zero.

BAT separately entered into a £5.68 billion revolving credit facility which has two revolving facilities (to be used for the general corporate purposes of the BAT Group: (1) a £2.84 billion 364-day facility, which is a new facility (Revolving Facility A); and (2) a £2.84 billion facility maturing on 29 May 2021, which effectively replaces BAT’s existing £3 billion revolving credit facility entered into on 29 May 2014). BAT has assumed this new revolving credit facility, the 2017 RCF, will not be drawn on with respect to the Proposed Acquisition and accordingly this facility has been excluded from the debt financing adjustments below.

In April 2017, RAI drew on its revolving credit facility for working capital and general corporate purposes. As these borrowings are not directly attributable to the transaction, they have not been reflected in the Pro Forma Financial Information.

The financing adjustments to cash and cash equivalents and borrowings reflected in the Unaudited Pro Forma Balance Sheet are as follows:

 

(in £ millions)       

Proceeds from Facility A

     12,136  

Proceeds from Facility B

     4,045  

Proceeds from Facility C

     2,023  

Proceeds from Facility D

     2,023  
  

 

 

 

Total sources of funding

     20,227  

Debt issuance costs

     (58) 1 
  

 

 

 

Total sources of funding, net

     20,169  
  

 

 

 

Presented as:

  

Current portion of borrowings adjustment

     12,113  

Non-current portion of borrowings adjustment

     8,056  

 

1 In relation to Facility A, Facility B, Facility C and Facility D, debt issuance costs are assumed to be £30 million, £12 million, £7 million and £9 million, respectively.

 

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(b) Financing charges

As detailed below, net financing costs consist of interest expense and facility fees.

Interest expense in the Unaudited Pro Forma Income Statement has been adjusted as follows based on the expected sources of funding described above:

 

(in £ millions)    Average principal      Interest rate      Interest expense  

Facility A

     12,136        1.72%        190  

Facility B

     4,045        1.77%        65  

Facility C

     2,023        1.94%        36  

Facility D

     2,023        2.04%        38  
  

 

 

       

 

 

 
Total      20,227           329  

Debt issuance cost amortisation:

        

Facility A

           21  

Facility B

           4  

Facility C

           1  

Facility D

           1  
        

 

 

 

Total Debt issuance cost amortisation

           27  
Total            356  
        

 

 

 

As at 12 June 2017, the BAT Group’s credit rating was BBB+ and Baa2 with Standard & Poor’s Ratings Services and Moody’s Investors Service, respectively. For purposes of the interest expense calculation, the BAT Group has assumed an interest rate based on the opening margin within the applicable margin matrix for each facility for an average credit rating of BBB+/Baa2 with increases at each period specified in the Acquisition Facility. The BAT Group has also considered the variability of the applicable margin based on the BAT Group’s credit rating in accordance with each applicable margin matrix, which each include a maximum rating of “A-/A3” to a minimum rating of “BBB-/Baa3 or below.” A change in the credit rating to BBB-/Baa3 or lower (or no rating) from BBB+/Baa2 would increase the interest expense for the Unaudited Pro Forma Income Statement by approximately £33 million. A change in the credit rating of the BAT Group to A-/A3 from BBB+/Baa2 would decrease the interest expense for the Unaudited Pro Forma Income Statement by approximately £11 million.

For the purposes of calculating the above interest expense, a three-month US dollar LIBOR rate of 1.24% as at 12 June 2017 has been assumed, which may differ from the rates in place when actually utilising the facilities. A hypothetical change in interest rates of 0.125% would increase or decrease total interest expense for the Unaudited Pro Forma Income Statement by approximately £23 million.

In addition to incremental interest charges, the BAT Group has also recorded a pro forma adjustment for debt issuance cost amortisation for each facility which will be deferred and amortised over the duration of the borrowings in accordance with IAS 39, Financial Instruments: Recognition and Measurement. This adjustment will have a continuing impact on the Combined Group for the remaining life of the borrowings.

For the purposes of the Unaudited Pro Forma Financial Information, the BAT Group has assumed that the new borrowings under the facilities will remain unchanged during the year ended 31 December 2016.

The BAT Group may continue to seek alternatives to refinance the facilities in order to achieve its long-term capital structure target. For the purposes of this Unaudited Pro Forma Financial Information, the BAT Group has assumed that no such financings, refinancings or repayments have occurred.

The adjustment to net finance (costs)/income in the Unaudited Pro Forma Income Statement of £(361) million comprises net finance costs of £356 million relating to the Acquisition Facility described in note 4(a) above, and £5 million relating to facility fees to be incurred with respect to Revolving Facility A. These facility fees will not have a continuing impact on the Combined Group.

Note 5: Pro forma adjustments related to the Proposed Acquisition

 

(a) Transaction and related costs

It has been estimated that total transaction and related costs of £226 million (£179 million after tax) will be incurred collectively by BAT and RAI in connection with the Proposed Acquisition, which include advisory, legal, audit, valuation and other professional fees. BAT and RAI each incurred £11 million, and £4 million of transaction and related costs, respectively (£9 million and £3 million after tax,

 

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respectively) in the year ended 31 December 2016. As a result, an adjustment of £211 million has been presented in the Unaudited Pro Forma Income Statement as an other operating expense along with an associated tax impact of £44 million. These one-off costs will not have a continuing impact on the results of the Combined Group.

An adjustment of £167 million has been presented in the Unaudited Pro Forma Balance Sheet as a reduction in cash and cash equivalents, which comprises the following:

 

  ·   Total transaction costs estimated to be incurred by BAT in conjunction with the Proposed Acquisition are £132 million (£107 million net of tax). An adjustment of £98 million has been presented in the Unaudited Pro Forma Balance Sheet as a reduction to cash and a corresponding reduction to retained earnings to represent the estimated total after tax transaction and related costs, net of those that have already been incurred by BAT.

 

  ·   Total transaction costs estimated by RAI in conjunction with the Proposed Acquisition are £94 million (£72 million net of tax). An adjustment of £69 million has been presented in the Unaudited Pro Forma Balance Sheet as a reduction to cash and a corresponding increase to goodwill as these transaction costs will reduce RAI’s retained earnings prior to Completion.

 

(b) Preliminary purchase consideration and allocation

The Proposed Acquisition will be accounted for as a business combination using the acquisition method of accounting in accordance with IFRS (EU). Under this method, the RAI Group assets acquired and liabilities assumed have been recorded based on preliminary estimates of fair value. In accordance with IFRS (EU), the BAT Group measures fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The final fair values will be determined upon Completion and may vary materially from these estimates.

Preliminary Purchase Price

The estimated purchase consideration is calculated as follows:

 

(in £ millions, except per share data and share price)       

RAI Shares outstanding as at 12 June 2017, other than those held by the BAT Group1

         825,054,505  

Exchange ratio

     0.5260  
  

 

 

 

Total BAT Shares to be issued to RAI Shareholders

     433,978,670  

BAT ADS closing price as at 12 June 2017

     £55.30  
  

 

 

 

Total equity consideration

     23,999 2 

Cash consideration

     19,183 3 

Additional consideration for share compensation

     75 4 
  

 

 

 
Total purchase consideration      43,257  
  

 

 

 

Add: Fair market value of total debt assumed

     11,605 5 

Less: Total cash acquired

     (1,659)  
  

 

 

 
Purchase consideration, including debt assumed and net of cash acquired      53,203  
  

 

 

 

Fair value of 42.2% BAT equity interest already held

     31,475 10 
  

 

 

 

Total purchase consideration and fair value of 42.2% BAT equity interest already held

     74,732  
  

 

 

 

 

1 Excluding the total number of shares of RAI common stock issuable under outstanding RAI equity awards that are expected to be settled for BAT ADSs in connection with the Proposed Acquisition.

 

2 The total equity consideration for each RAI Share was estimated using the closing price of BAT’s ADS on the NYSE MKT as at 12 June 2017 after giving effect to the BAT ADS ratio change converted to pound sterling using the mid-market exchange rate at 12 June 2017 of £0.78976/$1, and the number of shares outstanding not held by the BAT Group as at 12 June 2017 which was the last practicable date prior to the issuance of this Unaudited Pro Forma Financial Information. The actual purchase consideration will be determined upon Completion. A hypothetical 5% change in the price of BAT ADSs, all other factors remaining constant, would result in a corresponding increase or decrease in the total purchase consideration of £1.2 billion. Had the share price of BAT Shares as listed on the LSE of £54.62 as at 12 June 2017 been used in the calculation of total equity consideration, and all other factors remained constant, total purchase consideration would decrease by £295 million.

 

   No fractional New BAT ADSs will be issued in the Proposed Acquisition, and RAI Shareholders will receive cash in lieu of any fractional New BAT ADSs. The amount of cash required to be disbursed for the aggregated New BAT ADSs is not expected to be material, cannot be determined until the closing of the Proposed Acquisition and is not included in the Unaudited Pro Forma Financial Information.

 

 

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3 The total cash consideration was estimated using the RAI Shares outstanding as at 12 June 2017, other than those held by the BAT Group, and the $29.44 due to RAI Shareholders for each RAI Share other than those held by the BAT Group, converted to pound sterling using the mid-market exchange rate at 12 June 2017 of £0.78976/$1. A hypothetical 5% change in the exchange rate, all other factors remaining constant, would result in a corresponding increase or decrease in the total purchase consideration of £758 million.

 

4 Upon Completion, each Cash-out RSU will be cancelled and converted into the right to receive Merger Consideration for any accrued dividend equivalent right in respect of such Cash-out RSU, in each case less any required withholding taxes.

 

     Rollover Awards will be converted into a corresponding share award of BAT with respect to a target number of BAT ADSs equal to the product of (1) the target number of RAI Shares subject to the Rollover Awards immediately prior to Completion and (2) the RSU exchange ratio subject to adjustment as provided in the Merger Agreement to prevent dilution. The portion of the award that has been included as part of the consideration has been determined by multiplying the fair value of the award as at 12 June 2017 by the portion of the requisite service period that elapsed prior to the Proposed Acquisition divided by the total service period.

 

     The estimated portion of the award attributable to post-combination services resulted in additional compensation expense of £15 million in the Unaudited Pro Forma Income Statement (employee benefit costs) for the year ended 31 December 2016. This adjustment has been tax affected using a statutory tax rate of 39.5% resulting in a net adjustment of £9 million for the year ended 31 December 2016. This adjustment will not have a continuing impact on the Combined Group once the post-combination service period has elapsed.

 

     The RAI Group also has an equity incentive award plan for directors of RAI which provides grants of deferred share units. These units are settled in either cash or RAI Shares on the later of 2 January of a specified year or 2 January following his or her last year of service on the board. As these units can be cash settled they are accrued and recorded in other current and other non-current liabilities on the historical RAI balance sheet. Upon Completion, these deferred share units will be converted into the right to receive Merger Consideration or another form of payment (i.e., cash or BAT ADSs) as may be elected by each applicable director that is equal in value to the Merger Consideration, less any required withholding taxes, for each such deferred share unit. Accordingly, no adjustment has been recorded in the Unaudited Pro Forma Financial Information.

 

5 The estimated fair value of the RAI Group’s debt is estimated to be £11.6 billion, or a net increase of £954 million compared to the carrying value of £10.7 billion. An adjustment of £2 million and £952 million to the current and non-current portion of long-term borrowings, respectively, is recorded to adjust the carrying value to reflect the fair value of debt assumed, with a net increase in deferred tax asset of £377 million. As a result of the step-up in fair value of existing RAI Group debt, annual interest expense is reduced by £40 million, with an associated £16 million increase in income tax expense for the year ended 31 December 2016. Interest expense is further reduced to reflect the elimination of amortisation related to the RAI Group’s previously deferred debt issuance costs of £6 million for the year ended 31 December 2016 (£4 million net of tax). The total adjustment to interest expense is therefore £46 million (£28 million net of tax). This adjustment will have a continuing impact on the Combined Group for the remaining life of the RAI Group’s debt.

Preliminary Allocation of Purchase Price

The preliminary allocation of purchase consideration to estimated fair value of acquired assets and liabilities is as follows:

 

(in £ millions)       

Estimated fair values of assets acquired and liabilities assumed

  

Inventory

     1,899 6 

Identifiable intangible assets

     71,393 7 

Borrowings

     (11,605) 5 

Deferred taxes, net

     (26,951) 8 

Other net liabilities assumed

     (2,103) 9 

Goodwill

     42,099 10 
  

 

 

 
Total allocation      74,732  
  

 

 

 

 

6 The BAT Group’s pro forma fair value adjustment to inventory of £476 million is based on the RAI Group’s inventory as at 31 December 2016 with a carrying value of £1.4 billion. As the BAT Group sells the acquired inventory, its cost of sales will reflect the increased valuation of RAI’s inventory, which will temporarily reduce the BAT Group’s gross margins until such inventory is sold. Based on the assumption that those inventories will be sold within the first twelve months following the acquisition, an adjustment of £476 million (£288 million net of tax) has been presented in ‘raw materials and consumables used’ within the Unaudited Pro Forma Income Statement. This is considered a non-recurring adjustment.

 

7 The fair value of the RAI Group’s intangible assets is estimated to be £71.4 billion, or a net increase of £47.6 billion compared to a carrying value of £23.8 billion. The primary intangible assets include brands and trademarks, for which the fair value estimates of identifiable intangible assets have been determined based on publicly available benchmark data using the income approach. The assumptions used by the BAT Group to arrive at the estimated fair value of the identifiable intangible assets have been derived primarily from publicly available information, including market transactions of varying degrees of comparability. However, a detailed analysis has not been completed and actual results may differ materially from these estimates.

 

 

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     The RAI Group holds a number of internally developed patents and technologies, particularly in relation to its Next Generation Product business. The BAT Group does not have sufficient information at this time nor has it identified any appropriately comparable market transactions to perform any valuation analysis. These factors could result in differences between fair value and net book value. Accordingly, for the purposes of this Unaudited Pro Forma Financial Information, the Directors believe, to the best of their knowledge that the current RAI Group carrying values represent the best estimate of fair value. This estimate is preliminary and subject to change and could vary materially from the actual adjustment on the effective date of the Proposed Acquisition.

 

     The fair value and weighted average estimated useful life of identifiable intangible assets are estimated as follows:

 

     Fair value      Weighted-
average

estimated
useful life
     Annual
amortisation
 
     (in £ millions)      (in years)      (in £ millions)  

Trademarks and similar intangibles

     70,669        Indefinite        -  

Trademarks and similar intangibles

     570        20        29  

Trademarks and similar intangibles

     154        5-15        29  
  

 

 

       

 

 

 

Total acquired identifiable intangible assets

     71,393           58  
        

 

 

 
Less: RAI’s historical net book value of intangible assets (excluding goodwill)      (23,844)        
  

 

 

       

Adjustment to intangible assets, net

     47,549        
  

 

 

       

 

     Based on the estimated respective fair values of identified intangible assets and the weighted average estimated useful lives, an increase to amortisation expense of £58 million has been included in the Unaudited Pro Forma Income Statement. The related estimated net decrease to income tax expense for the Unaudited Pro Forma Income Statement is £23 million. This adjustment will recur for the life of the underlying assets.

 

8 A net adjustment of £19,134 million to non-current deferred tax liabilities has been recorded on the net fair value step-up on the RAI Group’s assets acquired and liabilities assumed. This adjustment includes the recognition of a deferred tax liability of £28,200 million relating to the estimated gross fair value of the RAI Group’s identified intangible assets, a £377 million deferred tax asset resulting from the fair value step-up of existing RAI Group debt discussed at note (5)(b)(5), and a £188 million deferred tax liability resulting from the fair value step-up of the RAI Group inventory as discussed in note (5)(b)(6), offset by the reversal of the RAI Group’s deferred tax balance of £8,877 million on its historical value of identified intangible assets.

 

9 Total net liabilities assumed excluding inventory, identifiable intangible assets, borrowings, net deferred taxes and goodwill was £2.1 billion. Fair value approximated carrying value; therefore, no adjustments were required for these balances. Property, plant and equipment is required to be measured at fair value unless those assets are classified as held-for-sale on the acquisition date. The acquired assets can include assets that are not intended to be used or sold, or that are intended to be used or sold, or that are intended to be used in a manner other than their highest and best use. The BAT Group does not have sufficient information at this time as to the specific nature, age, condition or location of the land and land improvements, buildings and leasehold improvements, machinery and equipment and construction-in-process, and the BAT Group does not know the appropriate valuation premise, in use or in exchange, as the valuation premise requires a certain level of knowledge about the assets being evaluated, as well as a profile of the associated market participants. All of these factors could result in differences between fair value and net book value. Accordingly, for the purposes of this Unaudited Pro Forma Financial Information, the Directors believe, to the best of their knowledge that the current RAI Group carrying values represent the best estimate of fair value. This estimate is preliminary and subject to change and could vary materially from the actual adjustment on the effective date of the Proposed Acquisition.

 

10 The goodwill balance arising from the Proposed Acquisition is estimated to be £42.1 billion which represents an adjustment of £29,161 million. The goodwill has been calculated as the excess of the sum of the purchase consideration of £43.3 billion and the £31.5 billion fair value of the equity interest already held by the BAT Group at the time of the Proposed Acquisition over the fair value of the net assets acquired of £32.6 billion.

 

11 As part of the Proposed Acquisition, the BAT Group’s previous equity method investment in RAI will be eliminated as part of the step acquisition. A step acquisition occurs when a controlling ownership interest is gained over a period of time. The accounting guidance requires that the previously held equity interest be remeasured at fair value and any difference between the fair value and the carrying value of the previously held equity interest be recognised as a gain or loss in the income statement. The implied value of the BAT Group’s 42.2% of equity interest in RAI was determined using the value of the Merger Consideration of 0.5260 of a New BAT Share and $29.44 in cash, without interest for each RAI Share based on the closing share price of BAT ADSs on the NYSE MKT, and the mid-market exchange rate of £0.78976/$1, each as at 12 June 2017, which was the last practicable date prior to the issuance of this Unaudited Pro Forma Financial Information. A hypothetical 5% change in the price of a BAT Share, all other factors remaining constant, would result in a corresponding increase or decrease in fair value of approximately £875 million. The carrying value of the BAT Group’s equity interest of £8.1 billion and £1.9 billion in profit after tax representing the BAT Group’s share of RAI’s earnings has been eliminated in the Unaudited Pro Forma Financial Information. The resulting gain of £23.4 billion (£15.2 billion net of tax) from the step acquisition is included in the Unaudited Pro Forma Income Statement and is non-recurring in nature.

 

 

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(c) Intercompany eliminations

Sales between, and balance due to and due from the BAT Group and the RAI Group have been eliminated in the Unaudited Pro Forma Financial Information. Sales from the BAT Group to the RAI Group amounted to £15 million for the year ended 31 December 2016, and sales from the RAI Group to the BAT Group amounted to £167 million for the year ended 31 December 2016. A total adjustment of £182 million has been made to reduce revenue and increase expenses relating to raw materials and consumables used to eliminate these transactions. The associated payable and receivable positions as at 31 December 2016 of £31 million have been eliminated in the Unaudited Pro Forma Balance Sheet.

During the year ended 31 December 2016, the BAT Group and the RAI Group agreed to an early termination of a contract manufacturing agreement and as a result the BAT Group agreed to make a compensation payment of $90 million to the RAI Group which the BAT Group recognised in expense immediately and the RAI Group recognised in deferred revenue. The RAI Group is recognising the deferred revenue into income pro-rata through to 31 December 2018. Adjustments to eliminate this transaction from the Unaudited Pro Forma Income Statement reverse the £73 million charge recorded by the BAT Group and the £9 million of other operating income recognised by the RAI Group. Adjustments to eliminate this transaction from the Unaudited Pro Forma Balance Sheet reverse the £31 million of non-current and £33 million of current deferred revenue recorded by the RAI Group to retained earnings and eliminate the £67 million of receivables and payables between the BAT Group and the RAI Group. The total pro forma adjustment to reduce both trade and other receivables and current trade and other payables in respect of this contract manufacturing agreement (£67 million) and to eliminate balances associated with trading between the BAT Group and the RAI Group explained in the previous paragraph (£31 million) is therefore £98 million.

Post-Completion, transactions and balances between BAT and RAI will be eliminated on consolidation.

 

(d) Impact on shareholders’ equity

The estimated impact on total shareholders’ equity is summarised as follows:

 

(in £ millions)   Transaction
and related
costs1
    Eliminate RAI
historical
equity2
    Issuance
of BAT
Shares3
    Gain on
elimination of
associate4
    Contract
manufacturing
agreement5
    Total
adjustments to
equity resulting
from the
Proposed
Acquisition
 
Share capital     -       -       108       -       -       108  
Share premium     -       (14,794)       23,966       -       -       9,172  
Other reserves     -       183       -       -       -       183  
Retained earnings     (98)       (3,023)       -       23,424       64       20,367  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Owners of the parent     (98)       (17,634)       24,074       23,424       64       29,830  
Non-controlling interest     -       -       -       -       -       -  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total shareholders’ equity     (98)       (17,634)       24,074       23,424       64       29,830  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 Refer to Note 5(a)

 

2 Refer to Unaudited Pro Forma Balance Sheet

 

3 Refer to Note 5(b)(2) and 5(b)(4)

 

4 Refer to Note 5(b)(11)

 

5 Refer to Note 5(c)

Note 6: Unaudited Pro forma earnings per share

The weighted average number of BAT Shares used in computing basic earnings per share has been calculated using the weighted average number of BAT Shares issued and outstanding during the period and the number of RAI Shares issued and outstanding as at the period end, giving effect to the exchange ratio established in the Merger Agreement. For the year ended 31 December 2016, the BAT Group pro forma basic earnings per share was calculated using 2,292 million weighted average shares, which reflects the 1,858 million weighted average shares of the BAT Group issued and outstanding for the period and the 825 million shares of RAI outstanding other than those held by the BAT Group at 31 December 2016, converted to 434 million shares per the Merger Agreement.

 

 

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The 2,302 million weighted average number of BAT Shares used in computing diluted earnings per share has been calculated using the 2,292 million basic average number of BAT Shares as per the paragraph above, adjusted for the dilutive impact of 7 million relevant to the BAT Group and 3 million relevant to RAI RSUs converted to 3 million shares per the exchange ratio set out in the Merger Agreement.

Note 7: Adjusting items

Adjusting items are defined in note 1 to the BAT Group’s consolidated financial statements for the year ended 31 December 2016.

As disclosed in note 3 to BAT Group’s consolidated financial statements for the year ended 31 December 2016, adjusting items in the BAT Group’s 2016 operating profit include:

 

  ·   restructuring and integration costs, totalling £603 million;

 

  ·   amortisation and impairment of trademarks and similar intangibles charges totalling £149 million;

 

  ·   charges related to Fox River totalling £20 million; and

 

  ·   South Korea sales tax charges totalling £53 million.

As disclosed in note 5 to BAT Group’s consolidated financial statements for the year ended 31 December 2016, adjusting items in the RAI Group’s 2016 operating profit include:

 

  ·   gain in relation to the sale of the international rights to NATURAL AMERICAN SPIRIT to JTI Holding of $4,861 million (£3,600 million);

 

  ·   implementation costs of $36 million (£27 million);

 

  ·   costs in respect of a number of Engle progeny lawsuits and other tobacco litigation charges that amounted to $86 million (£64 million);

 

  ·   income of $6 million (£4 million) related to the NPM Adjustment claims of the states no longer challenging the findings of non-diligence entered against them by an Arbitration Panel;

 

  ·   transaction costs of $5 million (£4 million), connected with the Proposed Acquisition; and

 

  ·   income relating to the early termination of the Manufacturing Agreement between BATUS Japan Inc. and RJR Tobacco Company of $90 million (£67 million).

These adjusting items are not directly related to the Proposed Acquisition and as such have not been adjusted for in the Unaudited Pro Forma Financial Information, with the exception of the income related to the early termination of the manufacturing agreement which is discussed above in Note 5(c).

Of the pro forma adjustments, adjusting items in the Combined Group operating profit would include:

 

  ·   gain on step acquisition of RAI of £23.4 billion (£15.2 billion net of tax);

 

  ·   transaction costs of £211 million (£167 million net of tax), connected with the Proposed Acquisition.

 

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Section B: Accountant’s report on Unaudited Pro Forma Financial Information

LOGO

The Directors

British American Tobacco p.l.c.

Globe House

4 Temple Place

London WC2R 2PG

14 June 2017

Ladies and Gentlemen

British American Tobacco p.l.c. (the ‘Company’)

We report on the pro forma balance sheet and income statement (the ‘Pro Forma Financial Information’) set out in Part IV of the Class 1 circular of the Company relating to the acquisition of Reynolds American Inc. dated 14 June 2017 (the ‘Circular’), which has been prepared on the basis described in note 1, for illustrative purposes only, to provide information about how the acquisition of Reynolds American Inc. and its subsidiary undertakings by the Company might have affected the financial information presented on the basis of the accounting policies adopted by the Company in preparing the financial statements for the period ended 31 December 2016.This report is required by paragraph 13.3.3R of the Listing Rules of the Financial Conduct Authority and is given for the purpose of complying with that paragraph and for no other purpose.

Responsibilities

It is the responsibility of the directors of the Company to prepare the Pro Forma Financial Information in accordance with paragraph 13.3.3R of the Listing Rules of the Financial Conduct Authority.

It is our responsibility to form an opinion, as required by paragraph 7 of Annex II of the Prospectus Directive Regulation, as to the proper compilation of the Pro Forma Financial Information and to report that opinion to you.

In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro Forma Financial Information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.

Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have as a result of the inclusion of this report in the Circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the Circular.

Basis of opinion

We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro Forma Financial Information with the directors of the Company.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro Forma Financial Information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of the Company.

Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.

 

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Opinion

In our opinion:

 

  a) the Pro Forma Financial Information has been properly compiled on the basis stated; and
  b) such basis is consistent with the accounting policies of the Company.

Yours faithfully

KPMG LLP

 

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PART V

SUMMARY OF THE PRINCIPAL TERMS AND CONDITIONS OF THE MERGER AGREEMENT

Pursuant to the terms of the Merger Agreement, on Completion, each RAI Share (other than any RAI Shares owned by the BAT Group or by RAI Shareholders who have properly asserted and not lost or effectively withdrawn appraisal rights) automatically will be converted into the right to receive the Merger Consideration. No fractional New BAT ADS will be issued as Merger Consideration, and RAI Shareholders will receive cash in lieu of any fractional New BAT ADS (based on the net cash proceeds from the sale by the Exchange Agent of the aggregated New BAT ADSs). The Series B Preferred Stock of RAI, held by a wholly owned subsidiary of RAI, will remain outstanding.

Each of RAI’s currently outstanding equity-based compensation awards will generally be converted on Completion into the right to receive the Merger Consideration for each RAI Share subject to such equity-based compensation award. The Retention RSUs, which are currently outstanding, and any equity-based compensation awards that are granted following entry into the Merger Agreement, will be converted into BAT equity awards on terms and conditions that are designed to preserve the value of the applicable equity-based compensation award.

BAT and RAI shall not be obliged to complete the Proposed Acquisition if any of the Conditions have not been met, or have not been waived, if applicable. These include:

 

  ·   Antitrust approvals:

 

  o   expiration or termination of the applicable waiting period (or extension thereof) under the HSR Act; and

 

  o   the earlier of the expiration of the waiting period required by Japanese merger control regulations and the receipt of clearance from the Japan Fair Trade Commission.

 

  ·   BAT Shareholder approvals:

 

  o   the approval of the Merger Agreement and other transactions contemplated by the Merger Agreement and for the Directors to allot and issue the New BAT Shares at the General Meeting.

 

  ·   RAI Shareholder approvals:

 

  o   approval of the Merger Agreement, by the holders of a majority of the outstanding shares of RAI capital stock entitled to vote at the RAI Special Meeting (the holder of Series B preferred stock of RAI (which is a wholly owned subsidiary of RAI), is not entitled to vote in respect of this stock); and

 

  o   approval of the Merger Agreement by the holders of a majority of the outstanding RAI Shares entitled to vote and present (in person or by proxy) and voting at the RAI Special Meeting that are not owned, directly or indirectly, by the BAT Group or any of RAI’s subsidiaries.

 

  ·   Admission of New BAT Shares to listing on the LSE and New BAT ADSs on the NYSE:

 

  o   approval for admission of the New BAT Shares to the premium listing segment of the Official List of the UKLA and to trading on the main market for listed securities of the LSE subject only to the issue of such New BAT Shares upon Completion; and

 

  o   approval for listing on the NYSE of the New BAT ADSs issuable to RAI Shareholders as the share portion of the Merger Consideration (subject to official notice of issuance).

 

  ·   Registration statements declared effective by the SEC:

 

  o   declaration by the SEC of the effectiveness of the registration statements filed on Form F-4 and Form F-6 relating to the New BAT Shares and New BAT ADSs to be issued as the share portion of the Merger Consideration (and the absence of any stop order suspending the effectiveness of such registration statements or any proceedings seeking such a stop order).

 

  ·   Other conditions:

 

  o   the filing of the Prospectus and this Circular with the UKLA, the approval of the Prospectus and this Circular by the UKLA and the mailing of this Circular and the publishing of the Prospectus, in each case, in accordance with applicable rules and regulations;

 

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  o   absence of any temporary restraining order, preliminary or permanent injunction or other judgment or law entered, enacted, promulgated, enforced or issued by any court or other governmental entity that prevents, makes illegal or prohibits the Completion or the issuance of the New BAT Shares;

 

  o   accuracy of the representations and warranties made in the Merger Agreement by the other party, subject to certain exceptions based on a material adverse change standard; and

 

  o   performance in all material respects by the other party of the obligations required under the Merger Agreement to be performed by it at or prior to Completion.

Pursuant to the requirements of the HSR Act, BAT and RAI filed Notification and Report Forms with respect to the Proposed Acquisition with the FTC and DOJ on 6 February 2017 and requested early termination of the HSR Act waiting period. The applicable HSR Act waiting period for the Proposed Acquisition expired on 8 March 2017.

On 23 March 2017, BAT and RAI filed notifications for the Proposed Acquisition with the Japan Fair Trade Commission. Approval from the Japan Fair Trade Commission was received on 4 April 2017. As a result of the foregoing, the Conditions related to antitrust approvals required as part of the closing conditions to the Proposed Acquisition have been satisfied.

BAT’s obligation to complete the Proposed Acquisition is further conditional upon the absence of any legal restraint issued by a governmental entity under any antitrust laws that would, directly or indirectly, result in (1) any prohibition or limitation on the ownership or operation by RAI, BAT or their respective subsidiaries of any portion of the business, properties or assets of RAI, BAT or their respective subsidiaries, (2) RAI, BAT or their respective subsidiaries being compelled to dispose of or hold separate any portion of the business, properties or assets of RAI, BAT or any of their respective subsidiaries, (3) any prohibition or limitation on the ability of BAT to acquire or hold, or exercise full right of ownership of, any shares of the capital stock of the RAI Group, including the right to vote such shares, or (4) any prohibition or limitation on BAT effectively controlling the business or operations of the RAI Group.

Each of RAI and BAT has agreed not to solicit proposals, engage in discussions or furnish non-public information relating to certain alternative transactions. Notwithstanding these “no-shop” restrictions, subject to the terms of the Merger Agreement, each of the board of directors of RAI and BAT (including the RAI Transaction Committee, in the case of RAI) has the right, prior to obtaining its applicable shareholder approvals and subject to providing notice to the other party and engaging in negotiations with the other party, to change its recommendation in connection with an alternative proposal that is reasonably expected to be superior to the transactions contemplated by the Merger Agreement or if the failure to make a change of recommendation would be inconsistent with its fiduciary duties under applicable law.

The Merger Agreement contains customary representations, warranties and covenants made by each of BAT, BATUS and Merger Sub and RAI. The Merger Agreement requires BAT to call and hold a shareholders’ meeting and, subject to the ability of the Directors to change their recommendation as described above, requires the Board to recommend without qualification that BAT Shareholders approve the Resolution. The Merger Agreement also requires RAI to call and hold a special shareholders’ meeting and, subject to the ability of the board of directors of RAI or the RAI Transaction Committee to change its recommendation as described above, requires RAI’s board of directors and RAI Transaction Committee to recommend that RAI Shareholders approve the Merger Agreement.

Unless a party terminates the Merger Agreement in connection with a change in the recommendation of the other party’s board of directors (or the RAI Transaction Committee, in the case of RAI), such other party remains obligated to call and hold its shareholders’ meeting and does not have the right to terminate the Merger Agreement. Pursuant to the terms of the Merger Agreement, even if the Board effects a change in recommendation with respect to the transactions contemplated by the Merger Agreement, BAT and its subsidiaries are required to vote in favour of the Proposed Acquisition, in respect of their shareholdings in RAI.

In addition, pursuant to the Merger Agreement, BAT will take all actions necessary to cause three directors serving on RAI’s board of directors (other than the directors designated for nomination by B&W, a subsidiary of BAT) immediately prior to Completion to be appointed to the Board upon Completion. Such directors will be selected by BAT prior to Completion after consultation with the RAI Transaction Committee.

 

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The Merger Agreement contains customary termination rights for each of RAI and BAT, including the right of each party to terminate the Merger Agreement if the Proposed Acquisition has not been completed on or before the End Date, subject to an extension of five business days if, on the initial End Date, BAT has not consummated all or any portion of the financing required to complete the Proposed Acquisition and the transactions contemplated by the Merger Agreement (the “Financing”). However, BAT’s consummation of the Financing is not a condition to the Completion.

Pursuant to the Merger Agreement, if the Merger Agreement is terminated, BAT will be entitled to receive a termination fee of $1 billion from RAI in the event that:

 

  ·   the RAI board of directors or any committee thereof changes its recommendation to RAI shareholders and either (1) the Merger Agreement is terminated because the RAI shareholders fail to approve the Merger Agreement at the RAI Special Meeting or no shareholders’ meeting is held prior to the End Date; or (2) BAT terminates the Merger Agreement as a result of such change in recommendation; or

 

  ·   (1) the Merger Agreement is terminated (or in certain circumstances could have been terminated) because the Proposed Acquisition has not occurred by the End Date (and at such time all antitrust approvals have been obtained and no legal restraint preventing the Completion is in effect), the RAI shareholders failed to approve the Merger Agreement at the RAI Special Meeting or RAI breached its obligations under the Merger Agreement, (2) prior to such termination, shareholder vote or breach, as applicable, and after the date of the Merger Agreement, a Company Takeover Proposal (as defined in the Merger Agreement) that contemplates acquiring a majority of the capital stock or assets of RAI was made or made known to RAI or its shareholders; and (3) within 12 months after such termination, RAI or any of its subsidiaries enters into a definitive agreement with respect to, or completes, such Company Takeover Proposal.

Pursuant to the Merger Agreement, if the Merger Agreement is terminated, RAI will be entitled to receive a termination fee of $1 billion from BAT in the event that:

 

  ·   the Board or any committee thereof changes its recommendation and either (1) the Merger Agreement is terminated because BAT Shareholders fail to approve the Resolution or no shareholders’ meeting is held prior to the End Date or (2) RAI terminates the Merger Agreement as a result of such change in recommendation; or

 

  ·   (1) the Merger Agreement is terminated (or in certain circumstances could have been terminated) because the Proposed Acquisition has not occurred by the End Date (and at such time all antitrust approvals have been obtained, no legal restraint preventing the Completion is in effect and no antitrust restriction (as defined in the Merger Agreement) is in effect), the BAT Shareholders failed to approve the Resolution at the shareholders’ meeting or BAT breached its obligations under the Merger Agreement, (2) prior to such termination, shareholder vote or breach, as applicable, and after the date of the Merger Agreement, a Parent Alternative Proposal (as defined in the Merger Agreement) that contemplates acquiring a majority of the shares in, or the assets of, BAT is publicly proposed or announced and (3) within 12 months after such termination, BAT enters into a definitive agreement with respect to, or completes, such Parent Alternative Proposal.

In addition, the Merger Agreement provides that RAI will be entitled to receive a termination fee of $500 million from BAT in the event that the Merger Agreement is terminated because the Proposed Acquisition has not occurred by the End Date and at the time of termination (1) all antitrust approvals that are Conditions have not been obtained, a legal restraint attributable to an antitrust law is in effect that prevents Completion or an antitrust restriction (as defined in the Merger Agreement) is in effect and (2) all other Conditions have been satisfied (or, in the case of any condition that is by its nature is to be satisfied at Completion, would be satisfied if Completion were to occur on the date of such termination. The Conditions related to antitrust approvals required as part of the closing conditions to the Proposed Acquisition have been satisfied. BAT must also pay a termination fee of $500 million to RAI if the Merger Agreement is terminated because a legal restraint attributable to antitrust law that prevents Completion has become final and non-appealable. BAT will not be required to pay the termination fees described in this paragraph if RAI has not complied with its obligation to use reasonable best efforts to complete the Proposed Acquisition as promptly as practicable.

 

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PART VI

ADDITIONAL INFORMATION

 

1. Responsibility

The Company and the Directors, whose names appear at paragraph 2 below, accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case) the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.

 

2. Directors

 

Directors     
Richard Burrows    Chairman
Nicandro Durante    Chief Executive
Ben Stevens    Finance Director
Kieran Poynter    Senior Independent Director
Sue Farr    Non-Executive Director
Ann Godbehere    Non-Executive Director
Dr Marion Helmes    Non-Executive Director
Savio Kwan    Non-Executive Director
Dr Pedro Malan    Non-Executive Director
Dimitri Panayotopoulos    Non-Executive Director

 

3. Information incorporated by reference

The following sections of the Prospectus are incorporated by reference into this document. Where the information described below itself incorporates further information by reference to another document, that further information is not intended to form part of this document for any purpose.

The Prospectus has been published by BAT and can be viewed on its website (http://www.bat.com/reynolds). The Prospectus contains information regarding, among other things, the reasons for the Proposed Acquisition, further details concerning BAT and RAI, historical financial information, the Directors, and the New BAT Shares.

BAT Shareholders may, subject to applicable securities laws, request a copy of the Prospectus by telephoning BAT Publications on +44 20 7511 7797. Calls are charged at the standard network or applicable international rate. BAT Publications are open between 9:00am and 5:00pm, Monday to Friday excluding public holidays in England and Wales. BAT Shareholders may also contact BAT Publications by email on bat@team365.co.uk. Please note that BAT Publications cannot provide any financial, legal or tax advice and calls may be recorded and monitored for security and training purposes.

The contents of the websites of BAT and RAI do not form part of this document and investors should not rely on them.

 

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Information incorporated by reference

  

Section of prospectus incorporated by
reference

  Prospectus
page
number(s)
 
Information on BAT     
Organisational structure    Part XIX (Additional Information) – 3 (Organisational structure) – 3.1 (BAT Group)     216 to 218  
Share capital    Part XIX (Additional Information) – 4 (Share capital)     220  
Rights attached to New BAT Shares    Part XIX (Additional Information) – 4.5 (Rights attached to New BAT Shares)     222  
Dilution of issued share capital    Part XIX (Additional Information) – 5 (Dilution)     222  
Details of Directors’ interests in BAT Shares    Part XIX (Additional Information) – 7.2 (Interests of Directors and Senior Managers in the share capital of BAT)     233 to 234  
Directors’ service agreements    Part XIX (Additional Information) – 9 (Directors’ terms and conditions)     240 to 242  
Directors’ other directorships    Part XIX (Additional Information) – 7 (Directors’ and senior managers interests) – 7.1 (Other Directorships)     231 to 233  
BAT share plans    Part XIX (Additional Information) – 7 (Directors’ and senior managers interests) – 7.2 (Interests of Directors and Senior Managers in the share capital of BAT) – 7.2.2 (Share awards)     233 to 238  
Interests of significant shareholders    Part XIX (Additional Information) – 12 (Significant Shareholders)     250  
Related-party transactions    Part XIX (Additional Information) – 16 (Related Party Transactions)     252  
Details of material contracts    Part XIX (Additional Information) – 17 (Material contracts) – 17.1 (BAT material contracts)     252 to 261  
Details of material litigation    Part XIX (Additional Information) – 18 (Material litigation) – 18.1 (BAT material litigation)     267 to 279  
Information on RAI     
Organisational structure    Part XIX (Additional Information) – 3 (Organisational structure) – 3.2 (The RAI Group)     219 to 220  
RAI share plans    Part XIX (Additional Information) – 10 (Employee Share Schemes) – 10.7 (Share-based awards granted by RAI)     249 to 250  
Details of material contracts    Part XIX (Additional Information) – 17 (Material contracts) – 17.2 (RAI material contracts)     261 to 267  
Details of material litigation    Part XIX (Additional Information) – 18 (Material litigation) – 18.2 (RAI material litigation)     279 to 306  
Unaudited consolidated financial statements of the RAI Group for the three months ended 31 March 2017 and the audit report    Part XV (Historical Financial Information of the RAI Group)     180  
Audited consolidated financial statements of the RAI Group for the years ended 31 December 2016, 2015 and 2014 and the audit report    Part XV (Historical Financial Information of the RAI Group)     180  
Audited consolidated financial statements of the RAI Group for the years ended 31 December 2015, 2014 and 2013 and the audit report    Part XV (Historical Financial Information of the RAI Group)     180  
Audited consolidated financial statements of the Lorillard Group for the year ended 31 December 2014 and the audit report    Part XV (Historical Financial Information of the RAI Group)     186  

 

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4. BAT

BAT was incorporated and registered in England and Wales on 23 July 1997 as a public limited company limited by shares with the name Measureprofit Public Limited Company and the registered number 03407696. By a special resolution, the Company changed its name to British American Tobacco p.l.c. on 24 April 1998.

The Company is domiciled in the United Kingdom with its registered office and principal place of business at Globe House, 4 Temple Place, London WC2R 2PG, United Kingdom. The telephone number of the Company’s registered office is +44 (0) 20 7845 1000.

The principal legislation under which the Company operates, and pursuant to which the BAT Shares have been, and the New BAT Shares will be, created is the Companies Act 2006 and the regulations made thereunder.

The statutory auditor of BAT, KPMG LLP is a member firm of the Institute of Chartered Accountants in England and Wales.

 

5. Material contracts

Paragraph 17.1 of Part XIX (Additional Information) of the Prospectus contains a summary of:

 

  ·   each material contract (other than contracts entered into in the ordinary course of business) to which BAT or another member of the BAT Group is a party, for the two years immediately preceding publication of this document; and

 

  ·   any other contract (not being a contract entered into in the ordinary course of business) entered into by any member of the BAT Group which contains any provision under which any member of the BAT Group has any obligation or entitlement which is material to the BAT Group as at the date of this document.

Paragraph 17.2 of Part XIX (Additional Information) of the Prospectus contains a summary of:

 

  ·   each material contract (other than contracts entered into in the ordinary course of business) to which RAI or another member of the RAI Group is a party, for the two years immediately preceding publication of this document; and

 

  ·   any other contract (not being a contract entered into in the ordinary course of business) entered into by any member of the RAI Group which contains any provision under which any member of the RAI Group has any obligation or entitlement which is material to the RAI Group as at the date of this document.

 

6. Working capital

The Company is of the opinion that, taking into account the Acquisition Facility and the 2017 RCF available to the Combined Group, the Combined Group has sufficient working capital for its present requirements, that is, for at least the next 12 months from the date of publication of this document.

 

7. No Significant change

There has been no significant change in the financial or trading position of the BAT Group since 31 December 2016, being the date to which the last audited financial information has been published.

There has been no significant change in the financial or trading position of the RAI Group since 31 March 2017, being the date to which the last unaudited financial information has been published.

 

8. Consents

KPMG has given and has not withdrawn its written consent to the inclusion of its reports on:

 

  ·   the unaudited reconciliations of the consolidated financial information of the RAI Group in paragraph 2 of Section B of Part III (Historical Financial Information of the RAI Group);

 

  ·   the historical financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015 in paragraph 3 of Section C of Part III (Historical Financial Information of the RAI Group);

 

  ·   the unaudited reconciliations of the consolidated financial information of the Lorillard Group for the year ended 31 December 2014 in paragraph 2 of Section D of Part III (Historical Financial Information of the RAI Group);

 

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  ·   the unaudited reconciliations of the consolidated financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015 in paragraph 3 of Section D of Part III (Historical Financial Information of the RAI Group); and

 

  ·   the unaudited pro forma financial information in Section B of Part IV (Unaudited Pro Forma Financial Information of the Combined Group),

in the form and context in which these reports appear.

Deutsche Bank has given and has not withdrawn its written consent to the inclusion in this document of the references to its name in the form and context in which they are included.

UBS has given and has not withdrawn its written consent to the inclusion in this document of references to its name in the form and context in which they are included.

Centerview Partners has given and has not withdrawn its written consent to the inclusion in this document of the references to its name in the form and context in which they are included.

 

9. Documents available for inspection

Copies of the following documents will be available for inspection at the Company’s registered office, Globe House, 4 Temple Place, London WC2R 2PG, United Kingdom during normal business hours on Monday to Friday each week (public holidays excepted) for a period of 12 months following Completion:

 

  ·   Memorandum of Association and the Articles of Association;

 

  ·   the Merger Agreement;

 

  ·   the annual reports and audited consolidated financial information for the BAT Group in respect of the three financial years ended 31 December 2016, 2015 and 2014;

 

  ·   the unaudited consolidated financial information of the RAI Group in respect of the three months ended 31 March 2017;

 

  ·   the audited consolidated financial information of the RAI Group in respect of the three financial years ended 31 December 2016, 2015 and 2014;

 

  ·   the audited consolidated financial information of the RAI Group in respect of the three financial years ended 31 December 2015, 2014 and 2013;

 

  ·   the audited consolidated financial information of the Lorillard Group for the year ended 31 December 2014;

 

  ·   the consolidated financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015;

 

  ·   KPMG’s reports on:

 

  o   the unaudited reconciliations of the consolidated financial information of the RAI Group in paragraph 2 of Section B of Part III (Historical Financial Information of the RAI Group);

 

  o   the historical financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015 in paragraph 3 of Section C of Part III (Historical Financial Information of the Lorillard Group);

 

  o   the unaudited reconciliations of the consolidated financial information of the Lorillard Group for the year ended 31 December 2014 in paragraph 2 of Section D of Part III (Historical Financial Information of the Lorillard Group);

 

  o   the unaudited reconciliations of the consolidated financial information of the Lorillard Group for the period from 1 January 2015 to 11 June 2015 in paragraph 3 of Section D of Part III (Historical Financial Information of the Lorillard Group); and

 

  o   the Unaudited Pro Forma Financial Information in Section B of Part IV (Pro Forma Financial Information of the Combined Group),

 

  ·   the consent letters referred to in paragraph 8 above;

 

  ·   the Prospectus; and

 

  ·   this Circular.

This document is dated 14 June 2017.

 

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PART VII

DEFINITIONS

The following definitions apply throughout this document, unless the context requires otherwise:

 

“2014 RCF”    the £3,000,000,000 revolving credit facility agreement dated 29 May 2014, between BAT, BATIF, BATHTN and BATNF as original borrowers, BAT as guarantor, HSBC Bank plc as agent and euro swingline agent and HSBC Bank USA, National Association as USD swingline agent and the lenders and financial institutions party thereto, and which will be cancelled at Completion
“2017 RCF”    the £5,680,000,000 forward starting revolving credit facility agreement dated 20 January 2017 between BAT, BATIF, BATHTN, BATNF and BATCAP, as original borrowers, BAT as guarantor, HSBC Bank plc as agent and euro swingline agent and HSBC Bank USA, National Association as US agent and USD swingline agent and the lenders and financial institutions party thereto, and which will be available to the BAT Group at Completion provided that applicable conditions precedent are met (including evidence that the 2014 RCF has been cancelled and, if applicable, repaid or prepaid in full)
“Acquisition Facility”    the term loan facilities agreement, dated as at 16 January 2017, among B.A.T. International Finance p.l.c. and B.A.T. Capital Corporation, as original borrowers, BAT, as guarantor, HSBC Bank plc, as agent, HSBC Bank USA, National Association, as US agent and the lenders and financial institutions party thereto, providing for an unsecured and unsubordinated term loan facility in an aggregate principal amount of up to $25 billion for the purpose of financing the Proposed Acquisition, paying related taxes, fees, costs and expenses and refinancing an existing revolving credit facility of RAI, and which will be available to the BAT Group at Completion provided that applicable conditions precedent are met
“Admission and Disclosure Standards”    the requirements contained in the publication “Admission and Disclosure Standards” dated 16 April 2013 containing, among other things, the admission requirements to be observed by companies seeking admission to trading on the LSE’s main market for listed securities
“Admission”    the admission of the New BAT Shares to the premium listing segment of the Official List and to trading on the LSE’s main market for listed securities becoming effective in accordance with paragraph 3.2.7 of the Listing Rules and the Admission and Disclosure Standards
“ADS”    American Depositary Share
“All Other”    the RAI operations other than RJR Tobacco, Santa Fe and American Snuff
“American Snuff”    the RAI operating segment which consists of the primary operations of American Snuff Co.
“American Snuff Co.”    American Snuff Company, LLC, an indirect wholly owned subsidiary of RAI
“Annual General Meeting”    the annual general meeting of the Company
“Articles of Association” or “Articles”    the articles of association of the Company
“BATUS”    BATUS Holdings Inc., a Delaware corporation and a wholly owned subsidiary of BAT
“B&W”    Brown & Williamson Holdings, Inc., (formerly, Brown & Williamson Tobacco Corporation) a wholly owned subsidiary of BAT
“BAT” or “Company”    British American Tobacco p.l.c., a public limited company incorporated under the laws of England and Wales, with company number 03407696 and its registered office in Globe House, 4 Temple Place, London, WC2R 2PG, United Kingdom

 

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“BAT ADSs”    American Depositary Shares representing the BAT Shares
“BAT ADS ratio change”    the ratio change agreement which changed the ratio of each BAT ADS representing two BAT Shares to each BAT ADS representing one BAT Share as at 14 February 2017
“BAT Group”    BAT and its subsidiary undertakings (as defined in the Companies Act 2006), from time to time
“BAT Publications”    British American Tobacco Publications, Unit 80, London Industrial Park, Roding Road, London, E6 6LS, United Kingdom
“BAT Shareholders”    the holders of BAT Shares
“BAT Shares”    ordinary shares of 25 pence each in the capital of the Company
“BAT Treasury Shares”    treasury shares held in BAT
“BATCAP”    B.A.T. Capital Corporation
“BATHTN”    British American Tobacco Holdings (The Netherlands) B.V.
“BATIF”    B.A.T. International Finance p.l.c.
“BATNF”    B.A.T. Netherlands Finance B.V.
“Board”    the board of Directors of the Company
“BTI”    BTI 2014 LLC
“business day”    a day (other than a Saturday or Sunday) on which banks are open for general business in either of London or New York
“Cash-out RSU”    each restricted stock unit and each performance share award, in each case, that was granted by RAI prior to the date of the Merger Agreement, other than Retention RSUs
“Centerview Partners”    Centerview Partners UK LLP
“Circular”    this circular to be sent by BAT to BAT Shareholders
“CNTC”    China National Tobacco Corporation
“Combined Group”    the BAT Group and the RAI Group after the Proposed Acquisition has taken effect
“Companies Act 2006”    an Act to reform company law and restate the greater part of the enactments relating to companies; to make other provision relating to companies and other forms of business organisation; to make provision about directors’ disqualification, business names, auditors and actuaries; to amend Part 9 of the Enterprise Act 2002; and for connected purposes, with the short title “the Companies Act 2006”
“Completion”    the completion of the Proposed Acquisition for the purposes of the Merger Agreement in accordance with its terms (and references to “complete” shall be construed accordingly)
“Conditions”    the conditions to Completion as set out in the Merger Agreement, and which are summarised in Part V (Summary of the Principal Terms and Conditions of the Merger Agreement) of this Circular
“CREST”    the system of paperless settlement of trades in listed securities of which Euroclear UK & Ireland Limited is the operator
“CTBAT”    CTBAT International Co. Limited
“CTP”    “Center for Tobacco Products”, established in 2009 by the FDA
“Depositary”    Citibank, N.A. in its capacity as depositary bank for the ADS.
“Deutsche Bank”    Deutsche Bank AG, London Branch
“Directors”    the directors of BAT whose names appear in Part I (Letter from the Chairman) of this Circular
“Disclosure Guidance and Transparency Rules”    the disclosure guidance and transparency rules made by the FCA under Part 6 of the FSMA

 

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“Divestiture”    the acquisition by Imperial Sub of certain assets (i) owned by certain RAI subsidiaries or affiliates relating to the cigarette brands WINSTON, KOOL and SALEM and (ii) owned by Lorillard subsidiaries or affiliates related to the cigarette brand Maverick and the “e-vapour” brand BLU (including SKYCIG), as well as Lorillard’s owned and leased property, and certain transferred employees, together with associated liabilities
“DOJ”    the US Department of Justice
“EBITDA”    earnings before interest, taxes, depreciation and amortisation
“ECB”    the European Central Bank
“Effective Date”    the date in which the Proposed Acquisition becomes effective in accordance with the terms under the Merger Agreement
“Employee Share Schemes”    the BAT Group’s employee share schemes, including the LTIP, the DSBS, the Shares Scheme and the ESOP, and the RAI Group’s employee share schemes including the RAI Omnibus Incentive Plan and Retention RSUs
“End Date”    31 December 2017
“EPS”    earnings per share
“EURIBOR”    the Euro Interbank Offered Rate
“Euroclear”    Euroclear UK & Ireland Limited, the operator of CREST
“Exchange Act”    the United States Securities Exchange Act of 1934, as amended
“Exchange Agent”    Citibank, N.A. in its capacity as exchange agent for the Proposed Transaction.
“Existing BAT ADSs”    the BAT ADSs representing the Existing BAT Shares
“Existing BAT Shares”    the entire issued share capital of BAT prior to the issue of the New BAT Shares
“FCA”    the Financial Conduct Authority
“FCPA”    the US Foreign Corrupt Practices Act of 1977
“FDA”    the US Food & Drug Administration
“FDA Tobacco Act”    Family Smoking Prevention and Tobacco Control Act of 2009, as amended
“Form F-4”    the registration statement on Form F-4 filed with the SEC relating to the registration under the Securities Act of the New BAT Shares constituting the share portion of the Merger Consideration
“Form F-6”    a registration statement on Form F-6 to be filed with the SEC relating to the registration under the Securities Act of the New BAT ADSs to be issued as part of the Merger Consideration and the change in BAT’s SEC reporting status
“FSMA”    the Financial Services and Markets Act 2000 (as amended)
“FTC”    the US Federal Trade Commission
“General Meeting”    the general meeting of BAT to be held at 2pm (UK time) on 19 July 2017, or any adjournment thereof
“Global Drive Brands”    DUNHILL, KENT, LUCKY STRIKE, PALL MALL and ROTHMANS collectively
“HSR Act”    the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
“IFRS (EU)”    International Financial Reporting Standards as adopted by the European Union
“IFRS (IASB)”    the International Accounting Standards Board for International Financial Reporting Standards
“ISIN”    International Security Identification Number
“Joint Financial Advisers”    Centreview Partners, Deutsche Bank and UBS
“Joint Sponsors”    Deutsche Bank and UBS

 

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“JSE”    the Johannesburg Stock Exchange
“JTI Holding”    JT International Holding BV, a subsidiary of JTI
“Latest Practicable Date”    12 June 2017 (being the latest practicable date prior to the publication of this Circular)
“LIBOR”    the London Interbank Offered Rate
“Listing Rules”    the listing rules made by the UKLA pursuant to Part 6 of the FSMA
“London Stock Exchange” or “LSE”    London Stock Exchange plc
“Lorillard”    Lorillard, Inc., n/k/a Lorillard, LLC
“Lorillard Group”    Lorillard and its subsidiary undertakings (as defined in the Companies Act 2006)
“Lorillard Merger”    the acquisition by RAI of Lorillard on 12 June 2015
“Lorillard Tobacco”    Lorillard Tobacco Company, LLC, f/k/a Lorillard Tobacco Company
“Memorandum of Association”    the memorandum of association of the Company
“Merger Agreement”    the Agreement and Plan of Merger, dated 16 January 2017, amended on 8 June 2017, and as it and the plan of merger contained therein may be amended from time to time, among BAT, BATUS, RAI and Merger Sub
“Merger Consideration”    the consideration, per RAI Share, to be received by RAI Shareholders in the Proposed Acquisition, consisting of (1) a number of BAT ADSs representing 0.5260 of a New BAT Share, plus (2) $29.44 in cash, without interest
“Merger Sub”    Flight Acquisition Corporation, a North Carolina corporation and indirect, wholly owned subsidiary of BAT
“MSA”    the Master Settlement Agreement, dated 23 November 1998 and between the 46 US States, the District of Columbia and five US territories and various tobacco manufacturers, including RJR Tobacco, B&W and Lorillard Tobacco, resolving various state health care cost recovery claims.
“MSAi”    Management Science Associates, Inc.
“NCBCA”    the North Carolina Business Corporation Act
“New BAT ADSs”    the BAT ADSs to be issued by the Depositary as part of the Merger Consideration
“New BAT Shares”    the BAT Shares underlying the BAT ADSs to be issued as the share portion of the Merger Consideration
“Next Generation Products”    refer, in relation to BAT’s view of such products, any tobacco or nicotine product developed to offer consumers potentially less risky alternatives to smoking conventional cigarettes and include (1) vapour products (such as e-cigarettes), which are battery powered electronic devices which heat a solution to create a vapour which can be inhaled, and (2) tobacco heating products, which are battery powered electronic devices that operate with specifically designed consumables containing tobacco, to deliver a real tobacco taste and aroma, and, in relation to RAI’s view of such products, the above-mentioned products as well as (a) any device that employs a chemical reaction or combustible, carbonaceous fuel source for heat generation to produce an aerosol from a physically separate source and (b) products that contain nicotine for therapeutic purposes (such as products characterised as gums, lozenges and inhalers that are intended to be nicotine replacement therapy products and products characterised as devices that are intended to be used for nicotine replacement therapy purposes)
“NNN”    N-Nitrosonornicotine
“Non-Executive Directors”    Richard Burrows, Kieran Poynter, Sue Farr, Ann Godbehere, Marion Helmes, Savio Kwan, Pedro Malan and Dimitri Panayotopoulos
“Notice of the General Meeting”    the notice for the General Meeting as set out on page 145 of this document

 

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“NPM Adjustment”    non-participating manufacturer adjustment included in the MSA that potentially reduces the annual payment obligations of RJR Tobacco Company, Lorillard Tobacco and the other participating manufacturers
“NYSE”    the New York Stock Exchange
“NYSE MKT”    the New York Stock Exchange MKT (formerly known as the “American Stock Exchange”)
“Official List”    the Official List of the UKLA
“PFSA”   

the form of proxy accompanying this Circular for use by certified BAT Shareholders on the SA Register

“Philip Morris USA”    Philip Morris USA Inc.
“PRA”    the Prudential Regulation Authority
“Proposed Acquisition”    the acquisition, by a subsidiary of the Company, of the remaining 57.8% of the shares in RAI, not already held by the Company or its subsidiaries, which will be effected through a statutory merger pursuant to the laws of North Carolina
“Prospectus”    the prospectus published by BAT in relation to the Proposed Acquisition on or around the date of this document relating to the New BAT Shares to be issued pursuant to the Proposed Acquisition.
“Prospectus Directive”    Directive of the European Parliament and of the Council 2003/71/EC, and amendments thereto, including the PD Amending Directive (2010/ 73/EU) and includes any relevant implementing measure in the Relevant Member State including the “Prospectus Directive Regulation” (809/2004)
“Prospectus Rules”    the prospectus rules made by the FCA under Part 6 of the FSMA
“Proxy Form”    the form of proxy accompanying this Circular for use by BAT Shareholders on the UK Register in connection with the General Meeting
“RAI”    Reynolds American Inc.
“RAI Group”    RAI and its subsidiary undertakings (as defined in the Companies Act 2006)
“RAI RSU”    any RAI restricted stock unit award subject solely to time-based vesting and not performance-based vesting (other than performance-based vesting only for purposes of Code Section 162(m)), payable in shares of RAI common stock or the value of which is determined with reference to the value of shares of RAI common stock, whether granted by RAI under an RAI equity-based compensation plan or otherwise
“RAI Shareholders”    the shareholders of RAI, excluding any shareholder which is a member of the BAT Group
“RAI Shares”    RAI common stock, par value $0.0001 per share
“RAI Special Meeting”    the special meeting of the RAI Shareholders to vote on certain matters in connection with the Proposed Acquisition scheduled to take place at 9am (New York time) on 19 July 2017
“RAI Transaction Committee”    the special committee formed by the RAI board of directors, initially formed to review and evaluate BAT’s initial proposal on 20 October 2016, the Proposed Acquisition and RAI’s other available strategic alternatives, consisting of independent directors of RAI not designated for nomination by B&W as at 28 October 2016, but which ceased to include Thomas C. Wajnert following his retirement from the RAI Board effective as at the close of business on 31 December 2016
“Registrars”    UK Registrar and SA Registrar
“Registration Statement”    the Form F-4 filed by the Company with the SEC in connection with the Proposed Acquisition
“Regulatory Information Service”    the Regulatory News Services of the LSE and the Stock Exchange News Service of the JSE

 

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“Resolution”    the ordinary resolution to approve the Proposed Acquisition, and the authority to allot BAT Shares in connection with the Proposed Acquisition, to be proposed at the General Meeting, the full text of which is set out in the Notice of General Meeting at the end of this document
“Retention RSUs”    as defined in the Merger Agreement, the three RAI restricted stock unit grants that were made prior to the date of the Merger Agreement, but will be assumed and will not be cashed-out in connection with the Proposed Acquisition
“RJR Tobacco”    the RAI operating segment which consists of the primary operations of RJR Tobacco Company
“RJR Tobacco Company”    R. J. Reynolds Tobacco Company, an indirect wholly owned subsidiary of RAI and successor-by-merger to Lorillard Tobacco
“RJR Vapor”    R. J. Reynolds Vapor Company, an indirect wholly owned subsidiary of RAI
“Rollover Awards”    the Retention RSUs and the equity based compensation awards granted by RAI following entry into the Merger Agreement, which will be assumed by BAT and will not be cashed-out in connection with the Proposed Acquisition
“RSU”    restricted stock units
“SA Transaction Sponsors”    UBS South Africa (Pty) Ltd
“SA Register”    the branch of the register of BAT Shareholders maintained in South Africa
“SA Registrar”    Computershare Investor Services Proprietary Limited
“Santa Fe”    the RAI operating segment which consists of the primary operations of SFNTC and includes the manufacturing and marketing of premium cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand in the United States
“Schedules 13E-3“    the filings on Schedule 13E-3 in relation to RAI
“SEC”    the United States Securities and Exchange Commission
“Securities Act”    the United States Securities Act of 1933 (as amended)
“Senior Managers”    those members of the management bodies of the Company and its subsidiary undertaking who are relevant to establishing that the Company has the appropriate expertise and experience for the management of its business for the purposes of paragraph 14.1 of Annex I of the Prospectus Rules being Jerome Abelman, Jack Bowles, Alan Davy, Giovanni Giordano, Andrew Gray, Tadeu Marroco, Ricardo Oberlander, Dr David O’Reilly, Naresh Sethi, Johan Vandermeulen and Kingsley Wheaton
“SFNTC”    Santa Fe Natural Tobacco Company, Inc., a wholly owned subsidiary of RAI
“SFRTI”    SFR Tobacco International GmbH
“Start Date”    the earlier of (1) the date of Completion and (2) the business day that is six months after 16 January 2017, as applicable in respect of the Acquisition Facility
“STR Data”    US cigarette (or smokeless tobacco products, as applicable) shipments to retail outlets
“Strate”    Strate Proprietary Limited, registration number 1998/022242/07, a private company incorporated under the laws of South Africa and the electronic settlement system for settlements that take place on the JSE and off-market trades
“UBS”    UBS Limited
“UK Register”    the register of BAT Shareholders maintained in the United Kingdom
“UK Registrar”    Computershare Investor Services PLC

 

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“UKLA”    the FCA when it is exercising its powers under Part 6 of the FSMA
“Unaudited Pro Forma Financial Information”    the unaudited pro forma income statement for the year ended 31 December 2016 and the unaudited pro forma balance sheet as at 31 December 2016 for the Combined Group
“United Kingdom” or “UK”    the United Kingdom of Great Britain and Northern Ireland
“United States” or “US”    the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia
“US GAAP”    generally accepted accounting principles in the United States
“Voting Instruction Form”    voting instruction form for owners of BAT Shares dematerialised into Strate

 

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APPENDIX 1

PROFIT FORECAST

Section A: The RAI Group unaudited financial forecasts relating to the period commencing 1 January 2017 and ending 31 December 2021

 

1. The RAI Group Long Range Forecasts

Certain long-range unaudited financial projections relating to the standalone RAI Group (the “RAI Group Standalone Projections”) have been disclosed in the Proxy Statement/Prospectus forming part of BAT’s Registration Statement on Form F-4 and the filings on Schedule 13E-3 in relation to RAI (the “Schedules 13E-3”), which have been filed with the US Securities and Exchange Commission.

In connection with the negotiation of the Proposed Acquisition, in October 2016, RAI prepared the RAI Group Standalone Projections based on the assumptions and estimates considered reasonable by RAI as at the date that the projections were prepared. The RAI Group Standalone Projections relate to RAI without giving effect to the Proposed Acquisition and were prepared by RAI’s management without any input from BAT and furnished, in whole or in part, to BAT, the RAI Transaction Committee, RAI board of directors (excluding Jerome Abelman and Ricardo Oberlander, the two members of the RAI board of directors designated by B&W and who also are Senior Managers of BAT or one of its subsidiaries, who voluntarily recused themselves from all meetings of the RAI board of directors at which the Proposed Acquisition or any potential alternative strategic transaction was or would be discussed or considered), the financial adviser of the RAI Transaction Committee, Goldman Sachs, and the financial advisers of the RAI board of directors, J.P. Morgan and Lazard. The RAI Group Standalone Projections were used by the RAI Transaction Committee and the RAI board of directors in connection with their evaluation of the Proposed Acquisition and were used by the financial advisers of the RAI Transaction Committee and the RAI board of directors in performing their respective financial analyses and preparing their respective opinions as to the fairness, from a financial point of view, of the merger consideration proposed to be paid by BAT to RAI shareholders (other than BAT and its affiliates), which opinions were delivered to the RAI Transaction Committee or the RAI board of directors, as applicable, in connection with their consideration of the Proposed Acquisition.

Certain RAI Group Standalone Projections were included in the Proxy Statement/Prospectus forming part of BAT’s Registration Statement on Form F-4 and others were required to be included in exhibits to the Schedules 13E-3 pursuant to specific requirements of the applicable rules and regulations promulgated by the US Securities and Exchange Commission.

The RAI Group Standalone Projections are forward-looking in nature. The RAI Group Standalone Projections for gross profit, operating income, net income, earnings per share, EBITDA and unlevered net income / earnings before interest and after taxes (“EBIAT”) do not reflect the potential impact of items such as mark-to-market pension/postretirement adjustments, implementation costs, debt restructuring activities and the Engle progeny cases, and their related cash flows, if applicable. RAI management cannot estimate on a forward-looking basis the impact of the items referred to in the preceding sentence to the RAI Group Standalone Projections because these items, which could be significant, are difficult to predict and may be highly variable. The RAI Group Standalone Projections relate to multiple future years, and such information by its nature becomes less predictive with each succeeding year. The RAI Group Standalone Projections refer to RAI as a public company on a standalone basis. Following the Proposed Acquisition, RAI will not be a publicly listed company in the United States. As a result, the RAI Group Standalone Projections will not be comparable to future results of the Combined Group reported under IFRS (EU) and IFRS (IASB), which will reflect the impact of the items noted earlier in this paragraph. Neither RAI nor BAT intends to update or revise the RAI Group Standalone Projections regardless of whether any or all of the assumptions underlying the projections are shown to be in error.

 

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The following RAI Group Standalone Projections were denominated in USD.

 

     RAI Group Standalone Projections
(in millions unless otherwise stated)
 
     FY17      FY18      FY19      FY20      FY21  
Gross profit    $ 7,892      $ 8,458      $ 8,922      $ 9,597      $ 10,303  
Operating Income1    $ 6,181      $ 6,736      $ 7,190      $ 7,880      $ 8,548  
Net Income2    $ 3,576      $ 3,903      $ 4,155      $ 4,583      $ 5,010  
EPS (per share)3    $ 2.53      $ 2.78           
1 Referred to as EBIT in the Lazard analysis.
2 Net Income is defined as Operating Income minus net interest and taxes.
3 EPS is presented on a diluted basis.

EBITDA1

 

     RAI Group Standalone Projections as Reflected in the
Respective Presentations of the  Applicable Financial Adviser(s)
(in millions)
 
     H2 FY17      FY17      FY18      FY19      FY20      FY21  
J.P. Morgan/Goldman Sachs ($)       $ 6,313      $ 6,877      $ 7,329      $ 8,026      $ 8,696  
Goldman Sachs (£)    £ 2,689        -      £ 5,643      £ 6,014      £ 6,587      £ 7,136  
Lazard    $ 3,278      $ 6,313      $ 6,877      $ 7,329      $ 8,026      $ 8,696  
1 EBITDA is defined as earnings before interest, taxes, depreciation and amortisation.

Operating Income1,2

 

     RAI Group Standalone Projections as Reflected in the
Respective Presentations of the Applicable Financial Adviser(s)
(in millions)
     H2 FY17                           
Lazard    $ 3,211                 
1 Referred to as EBIT in the Lazard analysis.
2 Operating income or EBIT is defined as EBITDA minus depreciation and amortisation.

Unlevered Net Income/EBIAT1,2

 

     RAI Group Standalone Projections as Reflected in the
Respective Presentations of the  Applicable Financial Adviser(s)
(in millions)
 
     FY17      FY18      FY19      FY20      FY21  
J.P. Morgan/Goldman Sachs/Lazard      $3,944      $ 4,286      $ 4,565      $ 5,000      $ 5,420  
1 Referred to as EBIAT in the J.P. Morgan and Goldman Sachs analysis and Unlevered Net Income in the Lazard analysis.
2 Unlevered Net Income or EBIAT is defined as Operating Income minus taxes.

Net Income1

 

     RAI Group Standalone Projections as Reflected in the
Respective Presentations of the Applicable Financial Adviser(s)
(in millions)
 
     FY19      FY20      FY21  
Lazard    $ 4,151      $ 4,578      $ 5,002  
1 Net Income is defined as Operating Income minus net interest and taxes.

Earnings Per Share1

 

     RAI Group Standalone Projections as Reflected in the
Respective Presentations of the Applicable Financial Adviser(s)
(per share)
 
     FY19      FY20      FY21  
Goldman Sachs    $ 2.99      $ 3.33      $ 3.67  
Lazard    $ 2.99      $ 3.33      $ 3.68  
1 EPS is presented on a diluted basis.

 

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2. In the view of BAT, the RAI Group Standalone Projections are no longer valid for the purpose of deciding how to vote in respect of the Resolution

For the reasons set out below, the Directors consider that the RAI Group Standalone Projections are no longer valid for the purpose of deciding how to vote in respect of the Resolution.

 

2.1 Purpose of preparation

In connection with the negotiation of the Proposed Acquisition, in October 2016, RAI prepared the RAI Group Standalone Projections based on the assumptions and estimates considered reasonable by RAI as at that date. The RAI Group Standalone Projections were prepared on the basis of RAI’s view alone as to the future performance of the RAI Group as a stand-alone business and therefore do not give effect to the Proposed Acquisition or any changes