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Reynolds American's Acquisition by BAT Gets Shareholders' Nod

Reynolds American Inc. RAI has finally got the shareholders’ approval for its acquisition by British American Tobacco p.l.c. BTI. The transaction, which is expected to complete on or about July 25, comprise $29.44 cash and a number of BAT American Depositary Shares representing 0.5260 of British American Tobacco’s ordinary share. British American is expected take over the remaining 57.8% of Reynolds American for $49 billion.

Notably, Reynolds American shareholders’ have approved three proposals, which are the Agreement and Plan of Merger, the compensation payments on a non-binding basis and the adjournment of the special meeting, if it is required.

Post-acquisition, the merged company will become the world’s largest publicly traded tobacco entity. It will own a global portfolio including next generation products and strong cigar brands including Newport, Kent from BAT, and Camel and Pall Mall from Reynolds.

Furthermore, British American is likely to generate a minimum of $400 million of savings via cost-cutting efforts, higher purchasing power as well as other efficiencies. Also, it plans to add roughly $38 billion of debt with the acquisition in addition to approximately $22 billion debt at the end of the previous year.

Earlier in Oct 2016, British American Tobacco offered to buy the remaining part of Reynolds American in order to expand in the U.S. In fact, Reynolds American’s board of directors formed a transaction committee to negotiate with BAT, given the latter’s existing ownership stake and representation on the board of directors.

In 2004, U.S.'s RJ Reynolds Tobacco Holdings and British American Tobacco’s Brown & Williamson Tobacco Corp. merged to create Reynolds American Inc., in which the latter held 42% share.

Notably, Reynolds American has been going through a rough phase as evident from its dismal earnings and sales surprise history, along with increasing competition in the vapor category, higher excise tax, declining tobacco volumes and strict anti-smoking regulations.

In addition, the company might face margin pressure owing to the pricing power of other major tobacco players in the industry such as Philip Morris International Inc. PM and Altria Group, Inc. MO.

In fact, this Zacks Rank #4 (Sell) stock has gained 3.3% in the last three months, compared with the Zacks categorized Tobacco industry’s advance of 6.2%. Currently, the industry is placed at bottom 32% of the Zacks Classified industries (175 out of 256).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coming back to the Reynolds American-BAT merger, we believe the combined entity is likely to further strengthen the tobacco industry. It will also benefit from Reynolds American’s strong position in the alternative tobacco and next-generation product development as well as R&D capabilities. Additionally, the new merged entity can develop an innovative pipeline of vapor and tobacco-heating products, going forward.

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