15 July 2014 by HCM
Today, RAI (Reynolds American, Inc) and Lorillard Inc. announced that they are proceeding with their merger, in a $27.4bln deal that will see RAI become a bigger competitor to U.S. market leader MO (Altria Group Inc). In line with recent press speculation, IMTLN (Imperial Tobacco Group Plc) will acquire $7.1bln worth of assets from the merged entity. In the process, IMTLN will lever up to a level that is not compatible with an IG rating, and the market has recently punished them for that, putting today the final touch to a 20bps widening in a little less than 10 days. But the company has clearly discussed the transaction with the rating agencies before the announcement, and Moody’s was able to reaffirm their rating very quickly, whilst putting them on negative outlook. That last bit is there to make sure that they use some of their ridiculous cash generation towards deleveraging and that they respect a strict timescale to do so. With that in mind, most of the damage to the 5 year risk premium of IMTLN might already be behind us.