British American Tobacco
Consumer Goods | United Kingdom
WSD Target Price
Annualized Return Since Publication
Target Equity Value (Δ)
Source: Bloomberg end of day market data; not adjusted for dividends (April 19, 2018).
Returns assume a short investment position on the date that WSD Capital Management published its thesis, and an exit on the date that the WSD Target Price is realized.
Returns do not reflect any taxes, fees or dividend and interest expenses related to short sales.
The returns are hypothetical and do not reflect the actual results of WSD Capital Management’s investment activities, nor is it necessarily indicative of future results of WSD Capital Management’s investment activities.
British American Tobacco (“BAT”) is a global tobacco group with over 200 brands sold in more than 200 markets and market leading positions around the world.
On July 25, 2017, BAT completed its purchase of Reynolds American, making it the world’s largest listed tobacco company. WSD Capital Management announced its short position in BAT on August 2, 2017. While we had to exit our short investment in Reynolds American, our short thesis remains intact to the detriment of BAT shareholders.
The rationale of the deal is clear and supported by a number of strategic pillars; nonetheless, we foresee significant shareholder value impairment ahead due to an environment of higher interest rates, a renewed momentum for new cigarette taxes, slowing sales, limited post-acquisition synergies, and currency headwinds.
On July 28, 2017, the U.S. Food and Drug Administration (“FDA”) announced that it intends to cut the amount of nicotine in cigarettes to nonaddictive levels in a new push to make cigarettes less addictive, a move that threatens to upend the tobacco industry and accelerate a shift toward new smoking technology. It is currently unclear if or how new legislation would impact the growth of “heat-not-burn” tobacco products.
On August 1, 2017, BAT disclosed that it is under official investigation by the Serious Fraud Office (“SFO”) over allegations it paid bribes in East Africa. The alleged payments were aimed at influencing laws surrounding the use of tobacco in the region.
On March 20, 2018, the FDA published a notice that it will consider restricting the use of menthol flavoring in cigarettes. It had previously examined menthol in 2013, but stopped short of proposing a ban.
Since BAT’s acquisition of Reynolds American in July 2017, the British tobacco company’s shares have underperformed its peers and the broader market by a wide margin. BAT’s share price fell around 33 percent, resulting in a loss of over £46 billion (~ $64 billion) in market value through April 19, 2018. The deal, which valued Reynolds American at around $86 billion versus our target of $60 billion, is on track to be one of the most overpriced and ill-timed acquisitions in financial history.
We exited our short position in BAT after the company’s common stock realized its target price in April 2018.