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Reynolds Confirms Talks Regarding Lorillard Acquisition

Zacks Equity Research

Tobacco giant Reynolds American Inc. (RAI) has finally confirmed its intention to take over Lorillard Inc. (LO) in an attempt to enhance its shareholder’s value.

There has been a buzz about a possible merger between the two tobacco biggies for quite some time. Per media reports, Reynolds has been exploring options to acquire its rival Lorillard since Mar 2014. Per the reports, Reynolds — the maker of Camel brand cigarettes — hired Lazard Ltd. (LAZ), an investment bank, to look for a possible deal with the third largest U.S. cigarette maker, Lorillard. The report further stated that the purchase price could be more than $20 billion.

The possible takeover will also require the consent of the U.K.-based British American Tobacco (BAT.V), which owns a roughly 42% stake in Reynolds, because the agreement might dilute its interests. BAT will have to subscribe for additional Reynolds shares, if the deal proceeds.

Another tobacco major, The Imperial Tobacco Group, is expected to buy some shares which Reynolds will have to shed to satisfy anti-trust issues.

The acquisition, if materialized, is expected to consolidate the tobacco industry and increase growth opportunities for Reynolds. The merger will bring brands like Newport and Camel under one banner. Reynolds is geared to cement its position in the e-cigarette category with the nationwide distribution of its flagship e-cigarette brand Vuse.

Moreover, Lorillard’s solid presence in the profitable e-cigarette market with its blu eCigs (acquired in Apr 2012) and the U.K.-based SKYCIG (acquired in Oct 2013) brands will help Reynolds gain share in the e-cigarette category.  However, the combined entity might pose a threat to peer Altria Group Inc. (MO), which manufactures Marlboro cigarettes and owns more than 40% market share in the U.S.

While Lorillard carries a Zacks Rank #2 (Buy), Reynolds currently carries a Zacks Rank #3 (Hold).

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