Reynolds Said Near Deal to Buy Lorillard With BAT Blessing

Jul 11, 2014 4:41 am ET

(Updates with BAT response in seventh paragraph.)

July 11 (Bloomberg) -- Reynolds American Inc., the producer of Camel cigarettes, is closing in on a purchase of Lorillard Inc. and may announce a deal as soon as next week with the blessing of British American Tobacco Plc, people with knowledge of the matter said.

BAT, based in London, owns 42 percent of Reynolds and would have to approve of any merger. The transaction -- which would follow months of on-again, off-again talks -- is complicated by its size and the involvement of several companies, and there is no guarantee a deal will get done, said the people, who asked not to be identified because the talks are private. Lorillard, based in Greensboro, North Carolina, has a market value of almost $23 billion.

As part of the deal, London-based Imperial Tobacco Group Plc will buy some brands from Reynolds and Lorillard in an effort to head off any antitrust concerns that the U.S. government may have, the people said. Imperial is lining up as much as $7 billion to buy some brands that the companies would sell off to assuage any antitrust concerns raised by the U.S. government, they said. In a statement today, Imperial confirmed that it’s in talks with the U.S. cigarette makers, though said a deal isn’t certain to happen.

“This confirms what we’ve known, that the U.S. cigarette industry is heating up,” Chris Wickham, an analyst at Oriel Securities in London, said by phone. “This is the first stage for some big battle lines that are being drawn.”

Intermittent Talks

If the three companies reach an agreement, Lorillard’s biggest brand, Newport, would join Camel as the combined company moves to compete with market leader Altria Group Inc., whose brands account for more than half of the U.S. retail cigarette market. Altria’s Marlboro by itself has market share in the U.S. of about 44 percent, according to the company’s website.

Merging Reynolds and Lorillard would create a company with a market value of at least $56 billion and annual sales of more than $13 billion, according to data compiled by Bloomberg. An agreement could be announced as early as July 14, said the people familiar with the situation.

Lorillard spokesman Bob Bannon said the company doesn’t comment on rumor and speculation. Bryan Hatchell, a spokesman for Reynolds American, didn’t return a call and e-mail seeking a comment. BAT spokeswoman Annie Brown declined to comment.

Shares Gain

Lorillard traded at the equivalent of $68.11 at 10:30 a.m. in Frankfurt trading, up 8 percent on yesterday’s closing price in New York. Reynolds American advanced 1.7 percent to $63.33. BAT gained 0.9 percent to 3,553 pence at 9:30 a.m. in London trading, while Imperial Tobacco rose 3.4 percent to 2,749 pence.

Imperial is most likely interested in Reynolds’s Kool, Winston and Salem brands, though may also be interested in Lorillard’s Maverick discount label, according to Erik Bloomquist, a tobacco analyst at Berenberg Bank in London.

“To finance this deal they would have to do a rights issue and go back to the shareholders for money,” Bloomquist said. “I don’t think the balance sheet could support a deal of this size.”

An Imperial Tobacco spokesman declined to comment on how the company would finance the acquisition.

Reynolds, Lorillard and BAT have been in talks since last fall to reach an agreement that would satisfy all three parties, people familiar with the matter have said. They had made a tentative deadline of July, those people said, because of a standstill agreement by BAT not to raise its stake in Reynolds, without the approval of Reynolds’s board, until this month.

Shrinking Demand

Reynolds and Lorillard are the biggest sellers of tobacco in the U.S. after Altria, with Lorillard’s Newport the nation’s top-selling menthol cigarette. Merger speculation has propelled stocks of both Lorillard and Reynolds this year.

Shrinking U.S. demand for cigarettes is putting pressure on tobacco companies to team up. Cigarette shipment volumes fell by a median of 2.9 percent among the industry’s top U.S. companies, according to data compiled by Bloomberg Industries. While electronic cigarettes offer a growth opportunity, that market is still young and faces mounting regulation.

BAT’s agreement keeping it from increasing its stake in Reynolds dates back to the merger of R.J. Reynolds Tobacco Holdings Inc. with Brown & Williamson Tobacco. The expiration could open the door to the companies working closer together amid a broader push for industry consolidation.

The Financial Times reported earlier that a deal could be announced next week.

--With assistance from Cotten Timberlake in Washington, Duane D. Stanford in Atlanta and Paul Jarvis, Matthew Boyle and Gabi Thesing in London.