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.
“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.
Full ratings data available on Benzinga Pro.
Do you have ideas for articles/interviews you'd like to see more of on Benzinga? Please email feedback@benzinga.com with your best article ideas. One person will be randomly selected to win a $20 Amazon gift card!date | ticker | name | Price Target | Upside/Downside | Recommendation | Firm |
---|
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.