Consumer Goods | United States
WSD Target Price
Annualized Return Since Publication
Target Equity Value (Δ)
Source: Bloomberg end of day market data; not adjusted for dividends (July 25, 2017).
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.
Reynolds American (“Reynolds American”) is the parent company of R.J. Reynolds Tobacco Company, Santa Fe Natural Tobacco Company, American Snuff Company, Niconovum USA, Niconovum AB, and R.J. Reynolds Vapor Company.
WSD Capital Management announced its short position in Reynolds American in September 2016. While the company’s management deemed 2015 the cigarette industry’s best year in terms of volume since 2006, we believe U.S. sales and margins have peaked due to the company’s failure to gain traction with consumers in the growing electronic cigarette segment.
In October 2016, the company disclosed that its third-quarter sales and profits trailed sell-side forecasts for the fourth consecutive quarter. This announcement was followed by the announcement of British American Tobacco’s (“BAT”) proposed takeover of Reynolds American. The transaction is expected to close in the third quarter of 2017.
Including net debt, the bid values Reynolds American at 16.3 times earnings before interest, tax, depreciation and amortization. This compares unfavorably to past transactions given that acquirers of tobacco companies over the past decade paid a multiple of 13.4 on average.
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.
Reynolds American insiders seem to share our outlook having collectively sold, on average, 35 percent of their shares in the company since the announcement of BAT’s bid.
On July 25, 2017, BAT completed its purchase of Reynolds American.