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Cough Up A bit More Please

21 October 2016 by lberuti

This morning, BATSLN ( British American Tobacco Plc ) offered to merge with RAI ( Reynolds American, Inc. ). BATSLN already owns 42% of RAI, and the offer targets the remaining 58%. Over the past few years, several failed attempts were made to take full ownership with a view to create a geographically diverse group, since RAI is focused on the US and BATSLN is weighted towards everywhere else. There would also be scope for scale economies in R&D for smokeless technologies, justifying the high multiples of the transaction – 16.3 times 12-month trailing Ebitda -. The current proposal values RAI at $56.5/share – that is a 20% premium to yesterday’s close – of which $24.13 will be cash, but discussions have not begun between the two companies and RAI was said to want a higher premium. In any case, the total cash contribution should be in excess of $20Bln and investors are expecting a heavy bond issuance to finance the deal which will increase leverage by roughly one time. They send BATSLN’s 5-year risk premium 7bps wider at 65bps without waiting for the final details of the operation. Meanwhile, the broader credit market was quiet, and traded volumes on credit indices stood 30 to 40% below average. While risk premia were a touch wider across the board, moves were kept minimal.