Corporate Finance : Reynolds American Borrows For Takeover

Winston-Salem, North Carolina-based Reynolds American, the parent company of R.J. Reynolds Tobacco, borrowed $1.65 billion in the high-yield debt market to help finance the purchase of Conwood, the second-largest manufacturer of smokeless tobacco products in the United States.

In a three-part offering of senior secured notes in the private-placement market, cigarette maker Reynolds American offered $625 million due in 2013, $775 million due in 2016 and $250 million due in 2018. Lehman Brothers, JPMorgan Securities and Citigroup Global Markets were the initial purchasers of the notes.

Reynolds American last month completed the $3.5 billion purchase of the holding company that owns Memphis, Tennesseebased Conwood. It funded the acquisition with proceeds of the debt issue and loans under its $1.55 billion senior secured term loan facility and available cash.The company also entered a $550 million revolving credit facility. Reynolds American will combine its Lane Limited specialty tobacco products unit, currently based in Tucker, Georgia, with Conwood in Memphis.

Analysts say Reynolds American paid a steep price for Conwood, which had 2005 operating income of $250 million on sales of more than $450 million, but that the smokeless tobacco business is growing faster than the cigarette business.

Conwoods strong, wellpositioned brands are gaining share in the growing moist-snuff market, and its high margins will enhance our ability to continue to provide an excellent return to our shareholders, Susan Ivey, Reynolds Americans chairman and CEO, said in a statement.The biggest high-yield issue in the US public market in May was Dallas-based Dean Foods $500 million offering of 10-year senior notes. The company is the largest distributor of milk and dairy products in the US. Its WhiteWave Foods subsidiary is the nations leading organic foods company, and it also owns the leading brand of organic dairy products in the United Kingdom and the fourth-largest dairy processor in Spain. Dean Foods says it plans to use all of the net proceeds from the sale of notes to reduce a corresponding amount of borrowings under its senior secured revolving-credit facility. Citigroup Global Markets acted as the sole bookrunning manager for the offering. The overall volume of new issuance in the US high-yield debt market fell to $7.8 billion in May from $10.2 billion in April, according to Montpelier, Vermont-based KDP Investment Advisers. Global debt capital market volume totaled $2.2 trillion in the year-to-date period ended May 23, down slightly from $2.3 trillion in the same period a year earlier, according to Dealogic. Issuers from the US accounted for more than half of the global volume, followed by Germany, which had 8% of the total. Citigroup leads global volume rankings in the year-to-date period of 2006, followed by Deutsche Bank, JPMorgan, Morgan Stanley and Lehman Brothers. Corporate high-yield volume in Asia, excluding Japan, totaled $11.1 billion in the year-to-date as of May 26, according to Dealogic, down 25% from $14.9 billion in the same period a year earlier.

Gordon Platt