British American Tobacco Picked A Good Time To Buy Reynolds American

British American Tobacco PLC (NYSEMKT: BTI) has offered to acquire Reynolds American, Inc. (NYSE: RAI). The takeover would make British American Tobacco “a better company as Reynolds has the fastest-growing brands in what we regard as the most attractive major tobacco market in the world,” Citi’s Adam Spielman said in a report.

Analyst Spielman maintained a Buy rating on British American Tobacco, with a price target of £54.

Assessing The Acquisition

The acquisition would make British American Tobacco a bigger company, with adjusted net income increasing by more than 30 percent. Spielman added that the company would have ~45 percent of operating income being generated from the US.

Reynolds American is gaining share, since it has a 42 percent share of the 18-30-year-old-smokers market, which is significantly higher than its overall market share of 35 percent.

The analyst noted, however, that the proposed deal would be very modestly EPS accretive given the high offer price. He expects the deal to add 3 percent in 2018 and 6 percent in 2019. The ROIC would also be low. “If the final price does indeed go higher, as we expect, then the EPS accretion is likely to be 1-2% lower.”

Spielman believes that the acquisition would leave British American Tobacco’s organic growth “more or less unaffected.”

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