British American Offer for Reynolds a "Bit Rich" says Analysts

British American Tobacco makes approach to Reynolds American; offer looks slightly rich at first glance say analysts 

Philip Gorham 21 October, 2016 | 11:44AM

British American Tobacco (BATS) announced that it has made an offer to acquire the remaining 57.8% of Reynolds American (RAI) it does not already own for a total consideration of $47 billion, or $56.50 per share.

Our initial impression is that the deal is slightly rich, and we may adjust our fair value estimate for British American when we have combined the discounted cash flow models. However, the deal would create a truly global tobacco giant, merging two wide-moat companies, and would slightly enhance British American’s competitive positioning.

There are several reasons why this is a good deal for British American strategically. Reynolds possesses solid competitive advantages, including very high brand loyalty to Newport, arguably the strongest brand in U.S. tobacco, and a cost advantage over smaller domestic manufacturers.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
British American Tobacco PLC3,189.50 GBX-2.57
Imperial Brands PLC1,466.50 GBX-2.53

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Philip Gorham  

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