Tobacco giants merger will make it the world's largest
Companies: British American Tobacco p.l.c.
British American Tobacco (LSE: BATS) announces a proposed $46.6bn acquisition of the 58% of Reynolds it doesn't already own. It plans to merge the two giants to create:
"the world's largest tobacco and Next Generation Products business by net turnover and operating profit"
The $46.6bn consideration is proposed to be 43% cash (ie $24 per Reynolds share) and the remainder in stock, equivalent to 0.55 BATS shares. Management expect the acquisition to be both earnings and dividend accretive in the first year but it flags only "modest cost synergies ".
Aside from the acquisition BATS also delivered an upbeat Interim Management Statement this morning covering the 9 months to September 2016.
Depending on whether you want to strip out currency effects or acquisitions the YTD revenue grew 6.2% for organic revenue, 8.1% on a constant currency basis and 10.2% at current FX rates. BATS has slightly grown market share (up 40bps) in its key markets, from which it earns 75% of its revenues.
Management confirm the market as a whole has continued its volume decline:
"Industry volume decline was in line with prior year at around 2.5%, driven by the continued impact of excise driven price increases in high volume market"
Shares are up 4% on the news this morning as the market welcomes the acquisition, the earnings accretion and the upbeat tone of the trading statement. BATS is up 31% over the last 12 months.
Looking at valuation and using the current consensus forecasts, the shares are trading on 20x 2016 earnings. This compares with Philip Morris which trades at c. 21x and Imperial Tobacco which trades at 16x.
Forecast 2016 dividends are 164p per share giving a coverage of 1.5x based on current consensus forecasts of 246p per share.
