RJR WINS BIDDING WAR FOR AMERICAN SPIRIT

Santa Fe Accepts $340 Million in Cash

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CHICAGO (AdAge.com) -- R.J. Reynolds Tobacco Holdings will acquire Santa Fe Natural Tobacco Co. for $340 million in cash, ending a 2 1/2-week bidding war between the No. 2 cigarette maker and Toronto-based Rothmans.

The merger, expected to close in January following approval from Santa Fe shareholders, adds Santa Fe's additive-free niche brand Natural American Spirit to RJR's arsenal of premium brands, which include Camel and Winston.

Staying independent
Santa Fe, with

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less than 1% share of the U.S. market, will continue to operate as an independent subsidiary, maintaining its corporate headquarters in Santa Fe, N.M., and manufacturing facilities in Oxford, N.C.

RJR, which had considered Santa Fe as a possible acquisition target earlier this year, took a renewed interest in the company after Rothmans announced its plan to acquire it for $275 million in cash and stock in September, Edward Sehon, RJR's director of financial communications told AdAge.com.

On Nov. 22, RJR bid $320 million in cash, which Rothman's trumped with an offer of $353.7 million in cash, stock and debt. RJR upped its bid to $340 in cash last week.

'A little expensive'
"It's a little expensive but a good deal for RJR," said Rob Campagnino, senior tobacco analyst at Prudential Securities, adding that RJR must be careful not to jeopardize the appeal of Natural American Spirit by making it too mainstream.

"I hope RJR realizes what makes American Spirit American Spirit. In addition to the all-natural positioning, I think it's the fact that it was seen as an alternative, not Big Tobacco," Mr. Campagnino said. "I think RJR has to be careful not to just one day push this through its distribution system and send it to all of its proprietary mailing lists."

But RJR maintains that it has no plans to alter the brand's attributes.

"The key is that Santa Fe maintains their independence," said RJR Chairman-CEO Andrew Schindler in a conference call with analysts and investors. "We have to maintain the authenticity of the company and the brand."

"Today, our best estimate is that Natural American Spirit is probably in about 10% of retail outlets," Mr. Schindler explained. "Given the nature of this brand, part of its cache and part of its mystique is related to the fact that it is not everywhere."

Mr. Schindler characterized Natural American Spirit as RJR's fifth investment brand, to be added to its current stable of core brands Camel, Winston, Salem and Doral.

"American Spirit has an equity in the market right now, an identity, and we would not want to do anything to disrupt that," Mr. Sehon said. "We think they've been doing things right."

Santa Fe, a privately held company, recorded net income of $20.5 million on $78.8 million in net sales last year.

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