British American Tobacco (LON:BATS) will likely have to significantly up the ante in its £38bn bid to acquire full control of US partner Reynolds America, rendering the deal far less attractive.
That, at least, is the view of a leading brokerage, which has taken a closer look at the putative transaction.
RBC Capital Markets wasn’t a fan BATS before it went public with its ambitions.
Today it said it is assuming the FTSE 100 giant will have to raise the bid premium to 30% above the pre-offer share price from 20% currently.
Increasing the price means the deal will enhance earnings per share of the combined group by just 3.8%, down from 4.7% under the current proposal.
The RBC number cruncher rates the stock ‘underperform’ although he did tweak up his valuation by £1 per share to £44 after re-running his numbers.
Last week BATs said it would pay Reynolds’s investors $56.50 per share in a cash and shares deal for the Lucky Strike and Camel cigarette maker.
The British group, currently the world’s second-largest tobacco firm behind Malboro maker Altria, already has just over 42% of Reynolds.
RBC would appear to be in the minority, according to the Broker Forecasts site which logs recommendations from London’s leading research houses.
Of the 13 number crunchers polled, nine are ‘buyers’ of the stock, while there is only one ‘seller’. The remainder, three, have ‘neutral’ calls.
Turning to the consensus price target, it currently stands at just under £52 a share – around £4 ahead of the company’s current valuation.