A Trump Tax Cut Could Add $8.2 Billion to Reynolds Price Tag


A Trump Tax Cut Could Add $8.2 Billion to Reynolds Price Tag
  1. A Trump Tax Cut Could Add $8.2 Billion to Reynolds Price Tag
    nm.nmcdn.us
    When British American Tobacco Plc bid $47 billion last year to buy the 58 percent of Reynolds American Inc. that it doesn't own, the coast was clear. BAT's existing stake nullified the threat of counterbids and regulatory issues looked non-existent. Then Americans voted…
    Companies

When British American Tobacco Plc bid $47 billion last year to buy the 58 percent of Reynolds American Inc. that it doesn’t own, the coast was clear. BAT’s existing stake nullified the threat of counterbids and regulatory issues looked non-existent. Then Americans voted in Donald Trump.

The president-elect and the Republican-controlled Congress want to slash the 35 percent tax rate for U.S. corporations. Trump wants to cut the rate to 15 percent, while House Republicans are seeking 20 percent.

For Winston-Salem, North Carolina-based Reynolds, which makes almost all of its $6 billion profit domestically, that’s a boon. For BAT, it’s a major headache, because the resulting higher earnings for Reynolds would justify an increase of as much as $8.2 billion in the bid, according to analysts.

“Trump’s tax proposals give Reynolds more ammunition to negotiate a bump to the offer,” Owen Bennett, an analyst at Jefferies, said by phone. Bennett estimates that a 25 percent corporate tax rate would increase the fair value of Reynolds by about $5 a share, while a cut to 15 percent would boost it by more than $10 a share.

BAT is offering cash and stock that’s worth about $55.39 a share for Reynolds holders. The proposal when it was made valued Reynolds, including net debt, at 16.3 times earnings before interest, tax, depreciation and amortization. That would be among the highest multiples ever paid in a tobacco merger, according to data compiled by Bloomberg. For London-based BAT, increasing the price may be unpalatable, but allowing the deal to slip through its fingers could be costly.

Besides missing out on milking more profit from the $116 billion U.S. smoking industry, BAT wouldn’t gain full access to Reynolds’ heated tobacco technology and thus would risk falling further behind behind Philip Morris International Inc. in the race to develop newer alternatives to smoking.

Reynolds rejected BAT’s initial offer and was seeking a higher price, people familiar with the matter said in November. Representatives for BAT and Reynolds declined to comment.

BAT isn’t the only company grappling with Trump’s imminent presidency. The…

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