Reynolds and Lorillard to reshape Big Tobacco with merger
Reynolds American and Lorillard are in the final stages of agreeing a complex merger that will reshape Big Tobacco by bringing together two of the three largest US operators with a combined market capitalisation of $56bn.
The deal will have a knock-on effect on the two big UK rivals, British American Tobacco – which has a 42 per cent stake in Reynolds – and Imperial Tobacco, which has confirmed it will buy assets from the merged group.
Reynolds, Lorillard and BAT have agreed key elements of the deal, including price, and are finalising details such as which cigarette brands and production facilities to dispose of in order to assuage antitrust concerns.
Negotiations between the three companies, which have gone on since early this year, have intensified in recent days and the parties hope to announce a deal as soon as next week, according to people familiar with the matter. No deal is certain, however, and the talks could still fall apart, these people said.
The FT first reported in March that Reynolds and Lorillard, the second and third largest tobacco producers in the US, respectively, were working on the proposed merger. But concerns about the response from competition regulators and the complexity of BAT owning a significant portion of Reynolds had stymied efforts to agree a deal.
Reynolds’ brands include Camel, Kool and Pall Mall. Lorillard’s brands include Maverick, Old Gold and Kent – though more than 80 per cent of Lorillard’s sales come from the Newport brand of menthol cigarettes, which have bucked a long-term decline in US smoking rates.
The US is one of the world’s biggest tobacco markets, with annual sales of $90bn, though it has been shrinking at a rate of 3 per cent a year.
In terms of market share, Reynolds and Lorillard lie behind Altria, which accounts for about half of the US cigarette market through its Philip Morris USA division. The company’s Marlboro cigarettes alone have a market share of about 44 per cent.
Imperial has 3 per cent of the US market.
Bonnie Herzog, analyst at Wells Fargo, said Imperial could be looking to acquire several Reynolds brands, including Winston, Salem, and the Kool menthol brand.
“Bottom line, this transaction in our view will be very positive for the global tobacco industry and could be just the beginning of future transactions with e-cigs/vapour being the underlying catalyst,” she said.
The Reynolds-Lorillard deal also raises questions for Japan Tobacco, which has made a big push into Europe but looks set to be effectively “shut out” from the US, said Chris Wickham, analyst at Oriel Securities.
“In the US you will have Altria, Reynolds-Lorillard, followed by Imperial. I don’t see Japan Tobacco among those names,” he said.
That might prompt the Japanese group to make a big acquisition, he added.
Reynolds and Lorillard did not immediately return requests for comment.
Imperial on Friday confirmed it was “in discussions with Reynolds and Lorillard to evaluate a possible acquisition of certain assets and brands owned by Reynolds and Lorillard”. Its shares were up 3.5 per cent at £27.51 in early Friday trading.
The move echoes the fallout from the 1999 merger of BAT with Rothmans International, when Imperial picked up 16 per cent market share in Australia as part of moves to satisfy regulators in the country.
BAT shares rose 1.4 per cent to £35.70.
Source: ft
