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It takes a bold sort to front-run the unpredictable Donald Trump. But that is what Nicandro Durante, the hard-nosed boss of British American Tobacco, is doing with a $US49.4 billion agreed offer for 58 per cent of Reynolds American. The bid would look decent value ordinarily. But we live in extraordinary times. Steep cuts to US corporate taxes could make the takeover a steal for the UK-based tobacco group.
BAT was expected to reclaim sole ownership of its US affiliate long before Mr Trump was anything more than an entrepreneur with hair as alarming as his Twitter feed. The litigation risks that prompted BAT's partial withdrawal from the US in the noughties have been attenuating. But Mr Trump's impending presidency has given Mr Durante an incentive to nail a price publicly, before 140-character broadsides become detailed policies.
BAT has bumped up its offer by just $US3.14 to an implied $US59.64 per Reynolds share. Importantly, Mr Durante is offering $US5.30 more in cash per share. The multiple – enterprise value would be 15 times earnings before interest, tax, depreciation and amortisation – is healthier than most of BAT's products. However, that metric ignores Reynolds' steep effective tax rate of about 37 per cent.
If Mr Trump slashes corporate taxes, bottom line profits from Reynolds would surge. This month RBC valued Reynolds at $US59 per share before reform and $US67 after, assuming a cut in headline tax to 15 per cent lasted until 2024.
The agreed deal is expected to take BAT's net debt to almost 4 times EBITDA before accounting for $US400 million in forecast cost synergies. Going steeply above that threshold might not seem risky to BAT's customers, who brave death for the pleasure of a crafty smoke. Rating agencies would probably disapprove, downgrading BAT's debt and so raising its interest costs.
Mr Durante says he has struck "the right deal at the right price at the right time". The third part of that formula may prove particularly prescient. Only fools and distinguished political commentators are in the business of second guessing The Donald. The inauguration and its aftermath, however, could leave Reynolds shareholders feeling short changed.
Financial Times