Tobacco giant, Reynolds American Inc. (RAI - Free Report) shares have been on the rise ever since the company announced that its highly anticipated tobacco merger with British American Tobacco (BTI - Free Report) seems to have cleared the antitrust hurdles from the U.S. authorities. In fact, the company’s shares have hit a 52-week high of $62.05 on Mar 18, 2017.
Factors Behind the Rally
The two participating companies had announced on Mar 19, 2017 that the U.S. Department of Justice or the Federal Trade Commission has not asked for any additional information regarding the proposed merger within the waiting period. This implied that the merger satisfies the transaction closing condition related to U.S. antitrust approval. Shares have hiked almost 2.2% after the merger got the clearance from the U.S. antitrust authorities.
Reynolds American entered into a merger agreement with British American Tobacco in Jan 2017, under which the latter will take over the remaining 57.8% of Reynolds for $49 billion. The deal comprises of $29.44 cash and a number of British American Tobacco American Depositary Shares representing 0.5260 of British American Tobacco’s ordinary share.
Investors are buoyed by the probable merger as the combined entity will further strengthen the tobacco industry. It will own a global portfolio including next generation products and strong cigar brands including Newport, Kent from British American Tobacco and Camel and Pall Mall from Reynolds. Moreover, the combined company will benefit from Reynolds’ strong position in the alternative tobacco and next-generation product development, and R&D capabilities. The two companies will also complement each other as Reynolds has most of its operations in the U.S., while British American Tobacco apart from its stake in Reynolds mostly operates outside the country. Additionally, the new merged entity can develop an innovative pipeline of vapor and tobacco-heating products.
The optimism of the investors surrounding the merger is evident from the share price movement of the company since British American Tobacco proposed the takeover, in Sep 2016. Shares of Reynolds gained 27% in the past six months, outperforming the Zacks categorized Consumer Staples sector which witnessed an increase of 1.6% during the same period.
Zacks Rank & Key Picks
Reynolds currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the consumer staples sector worth considering include,
Pinnacle Foods Inc. (PF - Free Report) and Sysco Corporation (SYY - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Pinnacle Foods has an expected earnings growth rate of 8.3% and Sysco has an expected earnings growth rate of 9%.
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