Reynolds American (RAI) Could Pay $80/sh for Lorillard (LO) - Wells Fargo

March 4, 2014 12:56 PM EST
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Reynolds American Inc. (NYSE: RAI) could pay as much as $80/sh for Lorillard (NYSE: LO) said Wells Fargo analyst Bonnie Herzog. Comments follow rumors Monday Reynolds hired Lazard to explore a deal.

"Based on our analysis, we believe RAI could pay up to $80/share for LO, incorporating synergies and cost savings of around $400MM (8% of LO's revenue) including: (1) manufacturing (potentially closing either LO’s or RAI’s plant which makes sense given we expect cig volume declines to accelerate as e-cigs continue to displace volume); (2) leveraging RAI's U.S. based e-cig manufacturing and co-development of future generations of e-vapor products, and (3) sales force and other headcount reductions," said Herzog.

"Our acquisition analysis assumes the following: (1) deal financed with 40% stock (~260MM new shares issued) and $750MM in cash, which represents approx. half of RAI’s current cash balance; (2) a 50% purchase premium resulting in an offer price of about $80 per share; (3) 5% average interest on new debt; and (4) pro forma net debt/EBITDA ratio of 4.0x which is expected to approach 3.0x within 2 years. (please see our interactive client model for further detail). Based on these assumptions, we expect this potential deal could be accretive to EPS as early as 2015," added the analyst.

Despite being bullish, Herzog has questions regarding the timing of the deal given the current lack of clarity on the FDA's potential menthol regulation.

Wells Fargo has an Outperform rating on Lorillard.

For an analyst ratings summary and ratings history on Lorillard click here. For more ratings news on Lorillard click here.

Shares of Lorillard closed at $53.61 yesterday.


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