Japan Tobacco set to acquire Reynolds American unit for $5bn

Japan Tobacco is in final rounds of talks to buy Reynolds American subsidiary Santa Fe Natural Tobacco for about $5bn (£3.29bn, €4.45bn). The deal is expected to be finalised this week.

Besides helping JT increase sales in domestic and overseas markets, the acquisition is in line with its recent initiative to focus on cigarette operations, as reflected by its exit from the soft-drink business in Japan this year. In February, Mitsuomi Koizumi, president, had said that 2015 would be the company's "year of investments," including increased stakes in other types of tobacco products such as e-cigarettes.

The Santa Fe deal will give the Japanese cigarette manufacturer access to marketing rights for the Natural American Spirit brand currently sold in the U.S., Japan and Europe.

Santa Fe reported $658m in sales and operating income of $337m for 2014. This highly profitable New Mexico-based company was founded in 1982. Its relatively new Natural American Spirit brand, marketed as made with additive-free tobacco, is popular among younger smokers and has become a premium brand in Japan. It is expected that JT will aggressively market this brand and position it behind its two other key brands -- Winston and Camel.

JT, a former state monopoly, was privatized in 1994. In the 1980s the Japanese government opened the domestic market to foreign competitors, after which JT started expanding offshore aggressively through acquisitions. Another reason for JT's acquisitions is a shrinking population and a stagnating smoking rate in its home market.

In the past, JT has actively acquired businesses not only in the tobacco space but also in the food and pharma sectors, both in its home country and overseas. These include the non-U.S. tobacco business of RJR Nabisco in 1999 for $7.8bn and Britain's Gallaher Group for $11.4bn in 2007.

JT eventually wants to become the world's largest cigarette manufacturer with brands such as Winston, Camel and Mevius, overtaking leader Philip Morris International and second-ranked British American Tobacco.