Wells Fargo weighs in with an analysis.
Reynolds American Inc. (RAI) and Lorillard (LO) received the final clearance needed to complete their merger and announced a date for the closing: Friday, June 12, with the brand divestitures of Winston, Salem, KOOL, Maverick and blu eCig brands to Imperial Tobacco’s ITG Brands.
The companies announced that the final “significant condition” pending before RAI can proceed with its acquisition of LO and complete the related divestiture transactions was successfully completed. The federal district court overseeing a remedial order in relation to a lawsuit brought by the U.S. Department of Justice against subsidiaries of RAI and LO, along with other companies, approved the sale of certain cigarette brands and businesses to Imperial Tobacco’s ITG Brands LLC subsidiary.
“We are very pleased to be able to proceed with this transformative acquisition,” said Susan Cameron, RAI’s president and CEO. “With the addition of Lorillard’s strong Newport brand, RAI’s operating companies will have brand portfolios that reflect diversification and strength across product categories and across geographies.”
Cameron said that she expects the transaction to provide RAI with additional resources to invest in innovation, R&D and its operating companies’ brands. “Investing in innovation will benefit adult tobacco consumers and wholesale and retail customers alike,” she said.
Wells Fargo Securities LLC noted that at the deal’s closing on Friday, LO shareholders will receive $50.50 in cash plus 0.2909 of a share of RAI stock.
“We reiterate our $90 valuation midpoint for RAI and pro forma (earnings per share) EPS estimates of $4.46/$5.04 for FY16/FY17, based on our comprehensive, detailed brand analysis,” said Bonnie Herzog, managing director, beverage, tobacco and convenience store research for Wells Fargo. “We have long believed the RAI-LO transaction is value creating for RAI and LO shareholders and therefore we reiterate our ‘Outperform’ rating on RAI and it remains our top pick. We believe the recent pressure on RAI’s stock price is unjustified and we encourage investors to build positions for the long-term, given the upside potential given RAI’s double digit EPS growth potential and attractive 4%+ dividend yield. We maintain our ‘Overweight’ tobacco sector rating and believe, based on the closing of this transaction and RAI becoming a more rational No. 2 player, cigarette pricing power will be even stronger.”