Reynolds American (RAI) is lighting up the marketplace after British American Tobacco (BTI) offered $47 billion Friday for the 58% of Reynolds that it doesn't already own. But Jim Cramer and TheStreet's Chief Investment Strategist Jack Mohr believe BTI will have to fire up the price to get the deal done.
"I bet British American has to pay more to get it," Cramer wrote in an analysis of the deal.
Reynolds shares were up some 13% to $53.44 at last check after British American surprised markets by proposing a merger that values the U.S. firm at $56.50 per share. That's about a 20% premium over Reynolds' previous closing price.
But Mohr told Real Money in an interview: "I don't think Reynolds will accept the deal under the current terms. Reynolds has a premium portfolio and a geographic advantage that suggests British American needs Reynolds more than Reynolds needs British American.
At issue is the premium that British American is offering to pay. Mohr, who co-manages the Action Alerts PLUS charitable trust with Cramer, believes that a 30% premium is closer to what Reynolds will be looking for, especially since British American structured its bid at 43% cash and 57% stock rather than all cash.
The analyst said the deal's cash ratio is crucial at a time when tobacco companies face falling demand due to health concerns and competition from e-cigarettes. Mohr said some Reynolds shareholders might want to cash out of the stock, but that the British American bid's relatively low cash portion limits the returns from cashing out.
Real Money chartist Bruce Kamich wrote in a research note that "prices opened at the deal price and have come off a bit, but if prices go back to the deal price or higher it may be a subtle technical hint that the offer could be sweetened."
A second hurdle for the deal is regulatory. Mohr believes that U.S. antitrust reviewers will ultimately snuff out the deal. He said the U.S. regulatory climate is rough right now for industries that are consolidating. For example, Action Alerts PLUS holding Walgreens Boots Alliance (WBA) and Rite Aid (RAD) announced plans Friday to push back their merger as they wait for regulatory approval.
Add to that the uncertain political climate ahead of November's presidential election and Mohr believes you have a perfect storm that could derail the Reynolds/British American deal. "If you are an investor looking at Reynolds, you should keep in mind that these deals are complex from a regulatory standpoint," he said. "This deal is complicated due to regional disparities as well as the need to placate disparate regulatory bodies."
Friday's merger news comes just two days after Reynolds stock hit a one-year intraday low. The tobacco giant's shares plunged after Reynolds missed analysts' top- and bottom-line expectations for the third quarter despite reporting increased revenue and profits from the year-ago period.
The stock had been performing well in previous quarters despite falling smoking rates and the potential threat that e-cigarettes pose. That was thanks to a $25 billion acquisition of rival Lorillard that Reynolds finalized last June. However, a rough summer quarter a year later has resulted in the stock giving back most of its post-acquisition gains.
Still, Cramer wrote in his analysis that "I wouldn't chase [Reynolds], and would rather say 'I missed it.'"
Either way, a Reynolds/British American deal could be just the buzz that the entire U.S. tobacco industry needs. Even though Americans only account for about 6% of worldwide cigarette sales by volume, the United States remains a lucrative tobacco market. Some 25% of the industry's global revenues come from the States. But it looks like British American has some work to do if it wants to seal the Reynolds deal.