Reynolds (RAI) Touches 52-Week High on Merger Agreement

Tobacco giant, Reynolds American Inc. 's RAI shares have been rising ever since the Camel and Pall Mall owner inked a merger agreement with British American Tobacco (BTI) on Jan 16, 2017 under which the latter will take over the remaining 57.8% of Reynolds for $49 billion. In fact, the company hit a 52-week high of $58.77 on Jan 20, 2017.

Reynolds' shares have experienced an uptrend after British American Tobacco expressed its intention of a buyout in Oct 2016. The company's shares have gained 6.6% in the past three months, outperforming the Zacks categorized Tobacco industry which has witnessed a gain of 3.4%.

What's Driving the Stock?

Reynolds American has agreed to merge with British American Tobacco for $29.44 cash and a number of American Depositary Shares representing 0.5260 of British American Tobacco's ordinary share. Investors were buoyed by the news, evident from the share rallied after Reynolds expressed its consent to the proposal.

We believe that the merger is not anticipated to face too many antitrust hurdles. While Reynolds has most of its operations in the U.S., British American Tobacco apart from its stake in Reynolds mostly operates outside the country.

The combined entity will truly own a global portfolio including next generation products and strong cigar brands including Kent from British American Tobacco and Camel, Newport and Pall Mall from Reynolds. Further, the combined company will benefit from Reynolds' strong position in the alternative tobacco and next-generation product development, and R&D capabilities. Consequently, the new merged entity can develop an innovative pipeline of vapor and tobacco-heating products.

Further, the new combined company will have a large share of market in the U.S., as well as a major presence in Africa, Asia, the Middle East and South America. Additionally, the merger will facilitate the already existing technology sharing agreement between the two companies.

Notably, the Zacks Rank #4 (Sell) company has been experiencing lower-than-expected top-line and bottom-line results in the past few quarters, primarily due to general shift of consumption away from tobacco products. We expect the takeover to help the company turn around in the near future.

Stock Picks

Some better-ranked stocks in the broader consumer staples sector include ConAgra Foods Inc. CAG , Campbell Soup Company CPB and Pinnacle Foods Inc. PF , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

ConAgra Foods has an expected earnings growth of 8%. Campbell Soup has an expected earnings growth rate of 5.6%, while Pinnacle Foods has a long-term growth rate of 6.5%.

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ConAgra Foods Inc. (CAG): Free Stock Analysis Report

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Reynolds American Inc. (RAI): Free Stock Analysis Report

Pinnacle Foods Inc. (PF): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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