The British American Tobacco-Reynolds American Stock Merger

My reaction to the news that British American Tobacco (BTI) has offered about $56 per share to purchase the 58% of Reynolds American (RAI) stock that it does not currently own.

I. What is the publicly traded fair value of Reynolds stock?

Consider this: Between 1992 and 2007, Reynolds American only saw its P/E ratio dip above 13x earnings once. It was a fourteen-month period between 2006 and 2007 in which Reynolds stock traded at a valuation of 15x earnings. Other than that, Reynolds was a stock that spent the 1990s and first half of the 2000s trading between 8x earnings and 12x earnings.

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