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Blu e-cigarette deal was crucial to Lorillard takeover -source

By Jilian Mincer, Anjali Athavaley and Anjuli Davies NEW YORK/LONDON, July 15 (Reuters) - Reynolds American Inc had no choice but to sell Lorillard Inc's top-selling blu electronic cigarettes brand after Britain's Imperial Tobacco Group Plc insisted it be part of a wider portfolio of assets it is buying, a source familiar with the transaction said.

The U.S. companies said on Tuesday that they were selling blu and a group of traditional cigarette brands to Imperial to ease antitrust concerns about Reynolds' proposed $27.4 billion acquisition of Lorillard.

Keeping blu would have given Lorillard and Reynolds more than 50 percent of the tiny but crucial U.S. e-cigarette market, further complicating a deal that was already expected to face heavy antitrust scrutiny.

"I think the widespread perception is if the deal stood as it was, it would have been off," said Steve Marascia, director of research at Capitol Securities Management.

Imperial will also acquire Reynolds' Kool, Salem and Winston brands as well as Lorillard's Maverick. But blu was a key sweetener to bring the British company into the deal, which would make it a credible third competitor in the U.S. market.

"It was very important for Imperial in terms of their competitiveness and their go-forward," Reynolds Chief Executive Officer Susan Cameron told Reuters.

Reynolds believed its newer Vuse brand was "superior technology," she added.

The source said blu was part of the negotiations.

"Imperial said they're only doing this if they get blu," said the source.

VUSE VS. BLU E-cigarettes are slim, reusable, metal tube devices containing nicotine-laced liquids that come in exotic flavors. When users puff, the nicotine is heated and released as a vapor containing no tar, unlike conventional cigarette smoke.

While Vuse's market share is significantly smaller than blu's 47 percent, Reynolds is the only one of the three largest U.S. tobacco companies to make its e-cigarettes in its home turf, at a factory in Kansas.

Reynolds executives have said they believe the domestic production gives them greater oversight and control of the ingredients and manufacturing of a product that has already drawn close scrutiny from the U.S. Food and Drug Administration and other regulators.

The company, which started selling Vuse roughly a year ago in Colorado and Utah, is rolling out the product nationwide this quarter.

Reynolds expects to share e-cigarette technology with top stakeholder British American Tobacco Plc and to cooperate on next-generation tobacco products such as heat-not-burn cigarettes and vapor cigarettes, said a company spokesman.

"This agreement with BAT holds great promise for global growth in those categories and will enhance value for all shareholders," he said.

Keeping blu would have at least temporarily given Reynolds and Lorillard, which bought the brand two years ago, a potentially unbeatable head start in the U.S. e-cigarette market.

That market share has been contracting, however, as Reynolds and Altria Group Inc rolled out their brands nationwide.

The e-cigarette category is still evolving, said Morningstar analyst Philip Gorham. While blu is the market leader now, he said, "we don't know for sure whether this technology will still be the leader in five years time or even two." (Editing by Lisa Von Ahn)