RAI Stock Analysis: Possible Buyout by BAT Increases Stock Price

BlairThe article was written by Blair Goldenberg, a Financial Analyst at I Know First, and enrolled in a Masters of Finance at Colorado State University.

RAI Stock Analysis

Summary

  • Background of Reynolds American Inc. (RAI)
  • RAI buyout by British American Tobacco
  • Health research from RAI
  • Current Analyst Rating
  • British American Stock vs. Reynolds American Inc. Stock
  • I Know First algorithm maintains a bullish stance on RAI for a long-term outlook

Background

RAI stock

Reynolds American Inc. (RAI) and its operating companies are leading the transformation of the tobacco industry. RAI’s goal is to ultimately achieve market leadership by effectively executing this transformation strategy. They will lead change in the tobacco industry by driving innovation throughout RAI’s businesses, redefining enjoyment for adult tobacco consumers, reducing the harm caused by smoking, and accelerating the decline in youth tobacco use.

Buyout by British American Tobacco

RAI stock

With possible acquisition of Reynolds American, Inc. by British American Tobacco (BAT), RAI’s stock has jumped roughly 11 points in just 5 days. This buyout could essentially catapult BAT into direct competition with Phillip Morris International Inc. (PM) and could even threaten PM’s top ranking. With the recent move towards e-cigarettes, traditional tobacco companies are scrambling to research new, safer ways to continue selling their products. RAI has been researching safer alternatives to the traditional unsafe cigarette since 1980. With the obtained research, BAT can compete with the iQOS. The iQOS is a battery-powered device that heats cigarettes called Marlboro HeatSticks. They release a tobacco-flavored vapor that Philip Morris says reduces by 95% consumers’ exposure to harmful constituents released by burning a regular smoke.

RAI stock

BAT already has a technology-sharing agreement with Reynolds, allowing BAT to license vapor products and collaborate on research and development, but buying Reynolds would give BAT all of the research and products produced by RAI. The buyout is for 57.8% of what is left of RAI from the earlier agreements between the two companies. BAT’s intention is to create the largest tobacco company internationally. After RAI’s board evaluates the offer they will respond to BAT.

Antitrust issues will not be a problem for the merger because, although the companies both produce tobacco products, they don’t produce similar enough products to overlap. For example, RAI has been researching and producing less harmful types of tobacco products while BAT mostly produces traditional cigarettes with little research into ways to curb harmful effects. This is good news for the merger and for the investors because legal issues won’t be a problem.

Because BAT is one of the leading tobacco suppliers in the world, the merger with RAI is revolutionary. RAI’s research into safer ways to smoke tobacco can now be manufactured through a larger party, thus making it more readily available to consumers. The shift to e-cigarettes has been substantial in recent years, but the larger tobacco industry hasn’t entirely evolved with the new change. If the deal between the two companies goes through, a top tobacco manufacturer will lead the way to a safer way of tobacco use.

rai stock

In recent years, RAI has seen a drop in sales because less people use tobacco products. The merger would benefit them because they would be able to have one of the top manufacturers in the industry help them with their research and products. So in essence, this deal is beneficial for both companies in different ways.

How Will RAI Decide?

Reynold’s board of 14 members will ultimately decide whether to proceed with the dealFive of the 14 on the board are BAT nominees. The majority of the already existing RAI shareholders will also be able to weigh in on the merger, ten of those top shareholders own 20% of BAT shares.

Analysts Recommendations 

RAI stock

RAI stock

British American Stock vs. Reynolds American Inc. Stock

When a company is bought out by another company, the investor has two options. In a cash exchange, the controlling company will buy the shares at the proposed price, and the shares will disappear from the owner’s portfolio, replaced with the corresponding amount of cash. Other times, companies will announce a stock-for-stock merger, in which holders of shares of the takeover company will have that stock replaced with shares of the new company. Often, the deal is structured as a combination of both methods, with shareholders receiving some cash and some stocks. Currently, BAT stock is $4,713.00 a share and RAI stock is at $55.10 a share. If BAT offers the stock-for-stock merger, investors would receive large returns quickly.

Conclusion

Tobacco companies are starting to change their old habits and improve the safety of their products. This buyout could help further move the tobacco industry into a new era where it no longer causes harmful side effects. Financially, current stock holders and future investors can benefit from this merger. Regardless what BAT offers investors, the investors will receive better returns in the future. Our algorithm predicts a steady and bullish increase in RAI in the near and far future.

I Know First Algorithm

 

i-know-first-3-5RAI stock

The forecast is color-coded, where green indicates a bullish signal while red indicates a bearish signal. Brighter greens signify that the algorithm is very bullish as it does at the top of this forecast. The signal is the number flush right in the middle of the box and the predicted direction (not a specific number or target price) for that asset, while the predictability is the historical correlation between the prediction and the actual market movements. Thus, the signal represents the forecasted strength of the prediction, while the predictability represents the level of confidence.

 


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