On 25 April 2006, Reynolds American Inc. announced an agreement to acquire Conwood, the second largest manufacturer of smokeless tobacco products in the USA, for US$3.5 billion, and the acquisition was completed on 31 May 2006. The acquisition was funded principally with debt, and the fair value of the assets acquired and liabilities assumed were US$4.1 billion and US$0.6 billion respectively. The Group’s share of non-current assets above includes £540 million of goodwill and £300 million of brands arising from the Conwood acquisition.
In addition, the non-current assets above include £1,207 million (2005: £1,376 million) of goodwill and £479 million (2005: £569 million) of brands arising from the Reynolds American transaction in 2004.
Details of the Group’s contingent liabilities are set out on note 30. In addition to US litigation involving Group companies, which is covered by the R.J. Reynolds Tobacco Company (RJRT) indemnity referred to in note 30, Reynolds American Inc. (RAI) group companies are named in litigation which does not involve Group companies. While it is impossible to be certain of the outcome of any particular case or of the amount of any possible adverse verdict, it is not impossible that the results of operations or cash flows of RAI, in particular quarterly or annual periods, could be materially affected by this and by the final outcome of any particular litigation. However, having regard to the contingent liability disclosures on litigation made by RAI in its public financial reports, the Directors are satisfied with the carrying value included above for RAI.
The Group’s share of the RAI results for the year to 31 December 2006 includes £24 million (2005: £35 million) in respect of external legal fees and other external product liability defence costs.
On 21 October 2005, the Group announced the exercise of its pre-emption rights over shares in Skandinavisk Tobakskompagni AS (STK), and the transaction was completed on 12 December 2005. As a result, the Group’s shareholding in STK increased from 26.6 per cent to 32.3 per cent, at a purchase price of £95 million, giving rise to £69 million of goodwill.