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British American's Acquisition Of Reynolds Makes It Jefferies' Preferred Global Tobacco Play

British American's Acquisition Of Reynolds Makes It Jefferies' Preferred Global Tobacco Play

Jefferies said in a note released on Monday that British American Tobacco PLC (ADR) (NYSE: BTI)'s acquisition of Reynolds American, Inc. (NYSE: RAI) makes the former its preferred global tobacco play.

British American Tobacco To Re-Rate After Deal

The note was written ahead of the deal announced by the companies, on the assumption that the deal would come through. After British American Tobacco sweetened its bid for buying the 57.8 percent stake it does not already own in Reynolds American, the companies announced a $49 billion agreement.

Analyst Owen Bennett is of the view that British American Tobacco would re-rate once the deal is out of the way. As far as Reynolds American is concerned, the analyst sees near-term support from the possibility of the takeover bid, although organic catalysts to the upside may not materialize until the back end of the year.

Japan Tobacco Under Pressure

Jefferies believes Japan Tobacco will come under pressure and that it could make an offer for Reynolds American. According to the firm, headwinds in Japan and Russia could weigh on the company.

More Consolidation In The Offing

Ahead of the announcement of the deal, Jefferies expected the British American Tobacco/Reynolds American deal to close. Following the deal, the firm expects a bid for Imperial Brands PLC (ADR) (OTC: IMBBY) within the next 12 months. The firm also sees British American Tobacco getting involved.

Additionally, Jefferies believes a Philip Morris International Inc. (NYSE: PM) bid for Altria Group Inc (NYSE: MO) is more complicated, but an Altria bid for Philip Morris could have a greater probability and makes more financial sense.

Plain Packs In 2017, Benefit From U.S. Tax

Jefferies expects plain packs to be fully implemented in the U.K. and France. News flow on possible introduction in other markets is expected to increase, the firm added. Although investors remain concerned of a repeat of growth in illicit and down-trading seen in Australia, the firm sees limited chances of this.

The firm also said further clarity on U.S. corporation tax could offer support for those with a U.S. domestic presence. While believing Altria is seeing some support, the firm thinks potential benefits at British American and Imperial Tobacco are yet to be reflected.

Further Downside Risks In 2017 Limited

Jefferies sees limited further downside risks in 2017, as the 10-year yield moves closer to staples yield and the possibility of a Trump tantrum. Within tobacco, the firm believes U.K. names are less vulnerable, given valuations relative to staples and the market. Based on valuations versus peers, the firm thinks British American Tobacco and Imperial Tobacco are more attractive.

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