A Tobacco Merger Approaches? Camel Maker Downplays Chatter

Source from:  The Wall Street Journal 07/18/2014

Reynolds American Inc.RAI, the second-largest U.S. tobacco company by revenue after Altria Group Inc.MO, has been at the center of lots of deal speculation in recent months.

One scenario circulating through markets has the maker of Camel cigarettes trying to acquire Lorillard Inc.LO , the No. 3 U.S. tobacco player and seller of Newport cigarettes. Another has U.K.-based British American TobaccoBATS.LN PLC increasing its 42% stake in Reynolds after a 10-year standstill agreement preventing a hostile takeover expires in July.

Although Reynolds Chief Executive Susan Cameron didn't extinguish speculation on either front Tuesday, she appeared to downplay the likelihood of major fireworks anytime soon.

Ms. Cameron, who replaced Daan Delen as CEO on May 1, said she wouldn't comment on Lorillard speculation or what the Reynolds board might or might not do. But at the same time, "I'm very confident in our organic business, let's just say that,'' she added during a question-and-answer session at an investor conference in New York hosted by Goldman Sachs.

Ms. Cameron said investors shouldn't speculate that her sudden, surprise return to Reynolds's helm after retiring as CEO in 2011 means such a deal is more likely. Mr. Delen decided to retire "a bit sooner" than planned for family reasons, prompting the board to ask her to take over again, she added.

The Reynolds CEO also downplayed the approaching expiration of the standstill deal with British American Tobacco, noting it would have to acquire all of Reynolds's shares before it could increase its minority board representation. British American currently can designate five of 13 Reynolds's directors, of which three must be independent.

"I don't see BAT as a stealth predator. I see them as a partner,'' she said at the Goldman conference, which was also webcast.

Ms. Cameron did add, though, that Reynolds has "a good relationship" with the U.K. company and that she and British American Tobacco CEO Nicandro Durante both see opportunities to share technology and team up in markets. Reynolds has a roughly 25% U.S. market share but a minimal presence elsewhere.

Such partnerships wouldn't require British American Tobacco to increase its equity stake in Reynolds. Philip Morris International Inc.PM , which sells Marlboro cigarettes outside the U.S., said last year it would join forces globally with Altria to sell smokeless products under a strategic and licensing partnership. Philip Morris was spun off from Altria in 2008.

Despite speculation of potential tobacco mega-deals, several industry analysts have questioned if Reynolds would try to acquire Lorillard while the Food and Drug Administration mulls a possible clampdown on menthol cigarettes, which represent the lion's share of Lorillard revenue. Analysts also have noted that there was nothing stopping British American Tobacco from making a friendly takeover approach to Reynolds in recent years.

Shares in Reynolds were 0.4% lower at $57.50 in early afternoon trade. Lorillard was 0.8% lower at $58.93. Enditem