Akfen Holding
Akfen Holding
February 16, 2015
British American Tobacco
British American Tobacco
August 2, 2017
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Reynolds American

Consumer Goods   |   United States

Reynolds American

Investment: Short
Status: Exited (Q3 2017)

Summary

In September 2016, we disclose a short position in Reynolds American (“Reynolds American”). The U.S. tobacco industry is under structural pressure: regulatory headwinds, rising excise taxes, declining cigarette volumes, and disruptive alternatives. Reynolds sits at the intersection of these trends, and yet the equity is priced as if none of the challenges matter.

Reynolds controls R.J. Reynolds, American Snuff, and a portfolio of vapor products. Its legacy brands and domestic reach suggest resilience, but they do not offset the risks of strategic inertia, margin compression, and consumer shift. The market has valued RAI on legacy metrics rather than on the stress of adapting to the next generation of tobacco and nicotine.

British American Tobacco’s bid to acquire RAI highlights this mispricing. At a reported valuation of roughly 16.3× EBITDA including net debt, BAT is overpaying for legacy assets at the peak of a structural decline. The transaction discounts regulatory and currency risks while overstating synergies. Reynolds American insiders seem to share this outlook, having sold a significant portion of their holdings since the announcement of BAT’s bid.

Our thesis is clear: decline in U.S. traditional tobacco is inevitable, and RAI is exposed. Even with consolidation, the deal terms are generous to insiders but punitive to long-term shareholders. We expect the market to reprice accordingly as fundamentals assert themselves.

We exited our short investment when BAT’s acquisition of Reynolds American closed in Q3 2017.

(This thesis is archived and reflects our views at the time of publication.)

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