The London-headquartered maker of Lucky Strike cigarettes is attempting to buy the 57.8% of Reynolds that it does not already own. In late October it offered $47 billion for the target, with $20 billion in cash and the remaining $27 billion in BAT shares.
Bloomberg news reported late on Monday that the target, which makes Camel and Newport cigarettes, has already rejected the offer as being too low.
British American Tobacco stock was up by 0.3%, to 4,310.0 pence ($53.87), on Tuesday morning in London but is still down by double digit numbers since the announcement in late October.
The rejection is unsurprising. Around 60% of BAT's offer is comprised of shares and the share-exchange ratio for the transaction was set using Oct. 20 closing prices.
Since then BAT's stock price has declined by nearly 12%, from its pre announcement level of 4,800.0 pence, meaning that the consideration due to be received by Reynolds investors is now lower.
But the merger is unlikely to fall at the first hurdle. Strategic benefits, synergies and the fact that BAT already owns 42.2% of the target will encourage BAT to sweeten its offer.
At the moment BAT's largest market is Japan, where it earns around 12.5% of its £13 billion of revenues according to Factset estimates, while it is also heavily reliant on emerging markets including Brazil, Russia and Mexico.
The planned merger will reorient BAT away from developing economies, which are low-margin and increasingly competitive, and toward developed markets. It will also see the world's second-largest tobacco firm by revenue combined with the fifth largest, to create a global cigarette giant that is dominant in both international markets as well as the U.S.
Jonathan Leinster, a tobacco analyst at Berenberg, said: "The U.S. market has, following Reynolds American's acquisition of Lorillard, become far more stable in terms of pricing and, crucially, is one where BAT's major international rival (Philip Morris International) is not present."
The combined entity will have more than $10 billion of U.S. revenue, making it the group's largest market, as well as a leading position in so-called next-generation products including electronic cigarettes. BAT management estimates that synergies could be worth as much as $400 million a year.
"Macros are supportive, pricing potential is significant (affordability levels similar to Russia), and also a large margin opportunity still," said Jefferies analyst Owen Bennett of the U.S. market.