Fitch Affirms & Removes R.J. Reynolds from Rating Watch Negative; Outlook Negative.

Business Editors

CHICAGO--(BUSINESS WIRE)--Oct. 28, 2003

Fitch Ratings has affirmed and removed R.J. Reynolds Tobacco Holdings, Inc. (RJR) from Rating Watch Negative following the Illinois Supreme Court's granting a stay of the Turner 'lights' cigarettes class action against R.J. Reynolds Tobacco (RJRT), and the announcement to combine its operations with Brown & Williamson (B&W). Fitch rates RJR's guaranteed senior notes and bank credit facility 'BB+' and senior notes 'BB'. The Rating Outlook is Negative. Rated debt is approximately $1.7 billion.

Yesterday, RJR and British American Tobacco plc (BAT, senior unsecured rated 'A-' by Fitch) announced a definitive agreement to combine the assets and operations of their U.S. businesses, RJRT and B&W to form Reynolds American Inc. (Reynolds American), which will be a new publicly-traded holding company. RJR shareholders will own 58% of the equity and BAT will own the remaining 42%. In addition, RJR will pay BAT $400 million in cash to acquire the stock of Lane Limited, a subsidiary that manufactures and distributes tobacco products. The anticipated closing of this transaction is the first half of 2004, pending the necessary approvals.

RJRT and B&W will combine to form the second largest U.S. tobacco company, with about $10 billion in annualized revenues and over 30% share of U.S. cigarette sales. B&W will transfer to RJRT cash equal to B&W's accrued Master Settlement Agreement liability, which fluctuates during the year but on average is $750 million, at closing. In addition, B&W will be indemnified by RJRT for historical and prospective litigation relating to its U.S. business. No incremental debt is involved in B&W's asset transfer. Reynolds American's annual dividend is expected to be approximately 75% of net income and share repurchases are not expected to be substantial.

Overall, the transaction is viewed positively and the combined companies should be better able to minimize or compensate for industry issues in the highly promotional and competitive U.S. tobacco industry. Reynolds American, with greater scale and cost efficiencies, also is expected to compete more effectively with the market leader. A primary driver of the lower cost structure for Reynolds American is the potential for $500 million of annual synergies within two years of the closing. These cost savings are beyond the $1 billion R.J. Reynolds plans to achieve by year end 2005, of which at least $350 million is expected to be realized in 2003.

The Rating Outlook is Negative because of continued heavy promotional expenditures, competition from other premium brands as well as deep discount brands, and consumption declines, possibly at accelerated levels. Also of concern is the execution risk of implementing a large scale restructuring and a significant business combination simultaneously. RJR's ratings rely upon maintenance of conservative financial policies and a high degree of liquidity to manage the uncertainties surrounding the current tobacco operating environment and tobacco-related litigation. Separately, while RJR's announced trademark and goodwill impairment charges significantly reduce equity, they do not impact cash flow.

For more in depth analysis of the domestic tobacco industry, see Fitch's Special Report 'U.S. Tobacco Industry Update', dated Oct. 22, 2003 and available on the Fitch Ratings web site at 'www.fitchratings.com'.