Speculation Grows Over a Reynolds American Bid for Lorillard

Analysts see attractive target; would deal be acquisition or merger?

Published in CSP Daily News

Reynolds American Lorillard

WINSTON-SALEM, N.C. -- With a possible price tag in excess of $20 billion, Reynolds American Inc. may make a bid for Lorillard Inc., said a report by The Financial Times blog FT Alphaville.

As reported in a 21st Century Smoke/CSP Daily News Flash, quoting knowledgeable sources, the blog said that Reynolds may offer as much as "$22 billion at first" in a bid for Lorillard.

Another blog, Betaville, followed up on the story saying Reynolds has been working with Lazard bankers while Lorillard has retained Centerview Partners.

Reynolds American spokesperson Maura Payne told CSP Daily News, "We have a policy of not commenting on rumors and speculation."

Representatives of Lorillard did not respond to a request for comment by press time.

"We have long held the view that Lorillard is the single most attractive strategic asset across global tobacco given the strength and current momentum of the Newport brand," said RBC Capital Markets Inc. analyst Nik Modi. "In addition, the company is now the leading e-cig player in the U.S."

Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC, New York, said, "Though we have long believed [Lorillard] may combine with another tobacco company and this has been part of our long-term bullish thesis on the stock, we question the timing of this since we'd think [Reynolds] would wait for further clarity on the FDA's potential recommendation on menthol regulation and e-cig regulation to a lesser extent, before pursuing a deal; however, we do believe there are many potential merits of a combination,"

She said Lorillard and Reynolds "together would be stronger to compete against industry leader [Altria]" and would create "substantial cost savings and synergies."

Herzog also questioned the mechanics of the potential acquisition. "Given the size of a potential acquisition of Lorillard would be quite large, we question how a bid from [Reynolds] would be financed' therefore, we think a more likely deal could be a merger between [Lorillard] and [Reynolds] rather than an acquisition."

Greensboro, N.C.-based Lorillard, through its Lorillard Tobacco Co. subsidiary, is the third largest manufacturer of cigarettes in the United States. Founded in 1760, it is the oldest continuously operating U.S. tobacco company. Newport, Lorillard's flagship premium cigarette brand, is the top-selling menthol and second largest selling cigarette in the United States. In addition to Newport, the Lorillard product line has four additional cigarette brand families marketed under the Kent, True, Maverick and Old Gold brand names. These five brands include 41 different product offerings which vary in price, taste, flavor, length and packaging. Lorillard, through its LOEC Inc. subsidiary, is also a leading U.S. e-cigarette company with its blu eCigs brand.

Winston-Salem, N.J.-based R.J. Reynolds Tobacco, an indirect subsidiary of Reynolds American Inc., is the second-largest tobacco company in the United States, with brands including Camel and Kool cigarettes.