A Look At British American Tobacco's Offer To Buy Reynolds American

Morgan Stanley said British American Tobacco PLC (ADR) BTI’s offer to buy Reynolds American, Inc. RAI for $56.50 is constructive for long-term consolidation in the tobacco industry.

“Our initial math on BAT's $56.50/share offer for RAI –16.3x LTM EV/EBITDA, 20% premium to prior close – points to ~5.5 percent EPS accretion (70bps lower for each $1/share adjustment in offer price),” analyst Matthew Grainger wrote in a note.

Grainger said the deal allows British American to utilize its increased post-Brexit equity value. The acquisition also boosts British American’s presence in the increasingly attractive US market and potential longer-term NGP efficiencies. However, the deal offers relatively modest financial accretion.

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“Note that for each $1/share increase in BAT's offer price, our estimated accretion would decline by ~70 bps (e.g., at ~$60/share, accretion would be ~3.5 percent),” Grainger highlighted.

Further, Grainger noted that the proposed synergies of $400 million (~3 percent of Reynolds American sales; 300 GBP) look generally realistic, but modestly conservative.

Lastly, the analyst sees limited regulatory hurdles given British American's heavy international exposure and Reynolds's US-focused business.

At the time of writing, shares of Reynolds American surged 16.58 percent to $54.99 before hitting a new 52-week high of $56.65. On the other hand, ADRs of British American Tobacco fell 6.11 percent to $110.91.

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