There is still the matter of FTC approval of the merger. That uncertainty has generated a risk discount to be built into the current share price.
LO's operations will be merged into RAI's except for blu e-cigs, which are being sold to Imperial, along with some of RAI's non-premium brands. Current LO shareholders will receive cash and fractional shares of RAI; another poster laid out the terms.
Please, don't jinx it! Seriously, barring unexpected FTC blockage of the merger, we should see a steady climb over the next few months until closing.
I tend to agree, and in fact, "swapped" some PM for MO about 4 months ago or so. Foreign exchange effects on PM's earnings are tedious.
I believe that the market's likelihood placement is between 80 and 85% currently: Using RAI's price at $68 makes the LO share merger value $70.28. Current LO shares are trading at $65.54 (9:58 am EST). If the deal does not occur I estimate LO will drop to $47.50 (I'm using 50% of $45 and $50). So the "gap" between LO with and without merger is $22.78. If we take the present value of the merger price ($70.28 discounted at 3% until my presumed merger date of 7/1/15) as a base, and then subtract the current LO price we get $3.82. To me this is the market's perceived risk. Divide this by the "gap" with and without merger and we get 16.8%, which is my assessment of the likelihood of non-merger, or conversely, an 83.2% likelihood of a deal.
If one uses $45 or $50 as the LO price if the deal is scuttled percentages in a range of 15% to 20% result, which is the 80% to 85% I cited in the beginning.
One further thought: although RAI must divest some brands to Imperial, the "new RAI" can focus on the main, more premium ones in which there may be more price increase ability, and any newer products that can help bolster revenue lost as smoking decreases. I don't believe that the foregone brands will be meaningful bottom-line sacrifices going forward.
My opinion only: I think yes. RAI gets a juggernaut brand in Newport, and can effect efficiencies, which, like it or not, are necessary in the challenging cigarette/tobacco market here in the U.S. and elsewhere. LO is really a one-trick pony, albeit a successful one. Yes, it has some non-menthols and the blu e-cig; but the latter is not assured of any traction and the non-menthols are after-thoughts. Any regulation affecting menthol would impact LO in a magnified way as Newport is c. 90% of its revenue. So there is/was some risk in a stand-alone LO pending clarity on any action the FDA might take.
As far as the deal itself goes, the terms monetize the value in LO. Effectively, we will get c. $69-70/share, which represents a large premium over its price six months before the merger rumors began.
Lastly, the market over-reacts to a sub-par quarter, and I think that a larger, merged entity has a better chance of smoothing potential results bumps than the two separate, a potential help to share price stability.
When the merger was first announced, RAI stated that its target was to maintain a 75% dividend payout (of net income). Currently the yield is between 4.1% and 4.2%. My own opinion is that the 75% payout will not exceed the 4.5% yield range. 5% is very aggressive and implies that the share price is ailing.
My opinion only!
Approaching $64 now. As I thought, until we get a clear sign that the FTC won't impose any roadblocks for approval, it will be a deliberate climb to the ultimate closing price level.
So, LO longs, 'patience is a virtue."
In the meantime, a happy holiday season to all, and a healthy and prosperous 2015!
When the deal was first announced (seems like ages ago!) a value of $69-70/ LO share was cited. This implies a RAI share price of up to $67 (for $70 for LO). So RAI's current level at $65-66 is likely within expectations. Next quarterly result will clearly have an impact.
Positive news, but not at all surprising: RAI and BTI would have deployed significant research/intelligence on the expected menthol outcome before making the overture for LO. What we need is a clearer signal that the FTC won't muddy the waters with any delay or request for alternations to the deal as agreed to. With LO still in the $63/share range, the markets still see some risk of non-closure.
Good luck to all LO longs!
cobra's formula is correct but he understated the RAI price; at yesterday's $65.20, at closing LO would be worth $69.47. Don't forget that almost $19 of that is in the form of RAI shares which you'd then need to sell (if you want to realize the entire profit); tax implications of that are unclear.
In my opinion (NOT ADVICE!) LO price should rise and approach the merger-deal value as it becomes clear that the FTC will approve the deal in its current form. We've seen it increase to $63 from the $58-59 level in the past month or so; this trend should continue barring bad news on the merger front. So if you wanted to get out before closing you likely can and make a $3 or $3.50 profit/share.
yes -- 1Q15 is what my "projection" was for. I don't think board will do anything aggressive; that, and modest EPS is why my increase is paltry.
But let's hope that FTC clears the merger and we can get on with the share price where it should be!
Given that the Duracell deal was transacted largely via P&G shares, how will this translate into value for PG longs? Is it strictly in the share valuation given fewer shares outstanding? Insight welcome!