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Why Did Reynolds American Reject BAT’s Offer?

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Price movement

Reynolds American (RAI) has a market cap of $78.3 billion. It fell 0.99% to close at $53.05 per share on November 14, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -3.6%, 12.2%, and 17.9%, respectively, on the same day.

RAI is trading 0.14% above its 20-day moving average, 6.5% above its 50-day moving average, and 6.8% above its 200-day moving average.

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Related ETF and peers

The Guggenheim S&P Equal Weight Consumer Staples ETF (RHS) invests 2.6% of its holdings in Reynolds American. The ETF tracks an equal-weighted index of large-cap US consumer staples stocks drawn from the S&P 500. The YTD price movement of RHS was 0.28% on November 14.

The market caps of Reynolds’s competitors are as follows:

  • Philip Morris International (PM) — $141.2 billion
  • Altria Group (MO) — $123.8 billion
  • Vector Group (VGR) — $2.8 billion

Latest news on Reynolds American

A November 14, 2016, Reuters report stated, “US cigarette maker Reynolds American Inc. is seeking a higher price from British American Tobacco Plc after rejecting its $47 billion takeover offer, a source familiar with the situation told Reuters.”

The report added, “The companies are still in talks and BAT is willing to increase the price slightly, Bloomberg said, citing people familiar with the matter.”

Reynolds American’s performance in fiscal 3Q16

Reynolds American (RAI) reported 3Q16 net sales of $3.20 billion, a rise of 1.4% compared to its net sales of $3.16 billion in 3Q15. Sales of the RJR Tobacco, Santa Fe, and American Snuff segments rose 0.80%, 21.6%, and 11.4%, respectively, between 3Q15 and 3Q16. The company’s cost of products sold as a percentage of net sales fell 730 basis points, and its operating margin rose 940 basis points.

Its net income and EPS (earnings per share) rose to $861 million and $0.60, respectively, in 3Q16, compared with $657 million and $0.46, respectively, in 3Q15. The company reported adjusted EPS of $0.61 in 3Q16, a rise of 10.9% over 3Q15.

Reynolds American’s cash and cash equivalents fell 26.1% between 4Q15 and 3Q16. Its debt-to-equity ratio fell to 1.4x in 3Q16, as compared to 1.9x in 4Q15.

The company has projected adjusted EPS in the range of $2.27–$2.33 for fiscal 2016. The company has also repurchased $75 million of its common stock under its share repurchase program.

Next, we’ll look at Harman International Industries (HAR).

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