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.

The average valuation for the stock from 1992 through 2007 was 10.3x earnings. This does not mean that this represented Reynolds’ intrinsic value. It just gives us a glimpse of how the investor community historically appraised the stock, which we can use as a reference point. … Read the rest of this article!