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Japan Tobacco to buy Reynolds American brand for $5 billion; shares dive

By Christopher Cushing

TOKYO (Reuters) - Japan Tobacco Inc (2914.T) has agreed to pay $5 billion (3.3 billion pounds) for Reynolds American Inc's (RAI.N) premium Natural American Spirit tobacco brand outside the United States - a deal that sent its shares plunging on concerns it was too expensive.

Japan already accounts for around half of Natural American Spirit's sales outside the U.S. market and analysts were upbeat about prospects for Japan Tobacco to use its wide distribution channels to boost sales of the no-additive high quality leaf brand.

The brand, which has seen rapid growth, also counts Germany, Switzerland and Italy as key markets. But the price tag, cited at 250 times the brand's earnings before interest and tax by analysts, has raised eyebrows.

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"Reynolds' brands are popular among people in their 20s and 30s and that's the segment Japan Tobacco does not have much of a customer base in, so in that sense there will be synergy. But I don't think it justifies the price," said Masashi Mori, analyst at Credit Suisse Securities in Tokyo.

Shares of Japan Tobacco fell 7.1 percent on Wednesday to six-month lows, compared to a 3.1 percent rise for the Nikkei benchmark index (.N225). Reynolds American ended Tuesday up 0.1 percent.

The former state monopoly, still 33.4 percent owned by the Japanese government, is no stranger to big deals and has a reputation for being able to nurture brands. It bought the non-U.S. tobacco business of RJR Nabisco Inc for around $7.8 billion in 1999 and British peer Gallaher Plc for about $18.8 billion in 2007.

Some analysts were more positive in tone.

"While we are surprised by the valuation, the addition of a super-premium product ... should position JT well to compete more effectively at the high-end of the market" in Japan, Cowen & Co analysts said in a research note.

For Reynolds American, the sale relieves it of the need to invest further to support the brand internationally, and will allow it to focus on the U.S. market as well as give it more leeway to pay down debt.

A spokesman at Japan Tobacco said the company will use cash on hand and bank loans to finance the deal, which is due to be concluded by early 2016 pending regulatory approval.

Reynolds American hired JP Morgan Securities (JPM.N) and Lazard (LAZ.N) as financial advisors, and Jones Day as legal advisor. Japan Tobacco was advised by international law firm Freshfields Bruckhaus Deringer.

(Reporting by Christopher Cushing; Additional reporting by Junko Fujita in Tokyo and Subrat Patnaik in Bengaluru; Editing by David Holmes and Edwina Gibbs)