Who knew that the earnings miss reported by Reynolds American, Inc. (NYSE:RAI) on October 19, and the stock’s subsequent decline to a 52-week low was a debacle cloaked in opportunity?
Here’s the uncomfortable truth. Hindsight is always 20/20 for the dumb and dumber amongst investors.
In reality, the smart money scooped up shares of cigarette maker Reynolds American off that low of $43.38 triggered by the dismal third quarter earnings report – as a result, shares closed much higher at $46.29.
If you look back, RAI suffered a selling climax that day, the bad news coming as it did at the end of a decline that took hold in early July.
The next day the stock gapped open higher but fell. Shares were again snapped up at lower levels: they touched a day’s low of $46.09 but closed at $47.17.
Reynolds American, Inc. (NYSE:RAI) shows its hand
Friday, of course, BAT’s $47 billion buyout offer was burning up the wires, and Reynolds opened with a huge gap of $9.48 at $56.65, which was also the day’s high.
The smart money now sold into the news, and in the reverse scheme of things, shares ended off the day’s high, closing at $53.78.
So… buy at the lows, sell into the highs. If that sounds like the old stock market chestnut, it is.
BAT wants all of Reynolds American, Inc. (NYSE:RAI) and will pay top dollar
Friday’s gap-open gains were triggered by the offer from British American Tobacco to buy up the remaining 57.8% of Reynolds it didn’t already own for about $47 billion in cash and shares.
BAT’s offer valued the Reynolds shares at $56.50, comprising $24.13 in cash and $32.37 in BAT shares, representing a premium of 20 percent over the closing price of Reynolds common stock on October 20.
Reynolds American, Inc. (NYSE:RAI): BAT offer “completely expected, still a surprise”
There have long been expectations of this deal between BAT and Reynolds.
Yet its timing was likely triggered by Brexit, which decimated the pound currency and pushed up UK shares, particularly BAT, which benefits from a weak pound because it exports globally.
So the decline in Reynolds, mentioned earlier in this article, and the post-Brexit jump in Reynolds, together brought the exchange ratio and valuation into do-able territory.