US: Reynolds Eyes Lorillard Tobacco Bid

Source from:  Financial Times 03/04/2014

Reynolds American, the US tobacco giant, is exploring a bid for its rival Lorillard, shaking up a global tobacco market that is already being reshaped by falling smoking rates and the growth of electronic cigarettes.

The exact value of a Reynolds bid could not be ascertained, but any offer could value the company at over $20bn, people familiar with the matter added. It was unclear if Reynolds, owner of RJ Reynolds brands including Camel, Pall Mall and Kool cigarettes, is planning to bid for all of Lorillard, buy part of it or seek a merger.

No deal was certain, these people stressed. Lorillard shares closed up 9.3 per cent at $53.61 on Monday, giving it a market value of $19.6bn.

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 wider US cigarette market, with annual sales of $90bn, has been shrinking at a rate of 3 per cent a year.

Lorillard, whose other brands include Maverick, Old Gold and Kent, was an early mover into e-cigarettes, buying the Blu brand in 2012 for $135m.

Analysts estimate that e-cigarette sales reached $2bn last year, three times 2012's figure, but with no federal regulations governing the nascent market yet, the e-cigarette industry faces a patchwork of conflicting local rules.

Founded in New York in 1760, Lorillard controlled 11.7 per cent of the North American tobacco market in 2012, according to Euromonitor, compared to Reynolds' 25 per cent and Altria's 41.5 per cent.

Reynolds has appointed Lazard, the investment bank, to explore the deal, according to people familiar with the situation. None of the parties involved were immediately available for comment.
 
If it went through, the deal would be the largest in the tobacco industry for many years. It would also see British American Tobacco taking a major role, as the UK group – which has a far smaller US market share – owns 42 per cent of Reynolds.

BAT took its stake almost a decade ago. A standstill agreement preventing a hostile takeover by the UK group comes to an end in July.

Bonnie Herzog, an analyst with Wells Fargo Securities, said a "fair" price for Reynolds to offer could be "much higher" than $60.

The combination would create a stronger competitor to Altria, the industry leader, she said, and could reap "substantial cost savings and synergies". However, she raised questions about how Reynolds would finance such a move, saying it could be structured instead as merger, or BAT could help finance a takeover.

Ms Herzog questioned whether Reynolds might want to wait for a clearer picture to emerge on the Food and Drug Administration's current reviews of the regulations on both menthol cigarettes and e-cigarettes.

RJR merged with Nabisco Brands in 1985, and the group's name changed to RJR Nabisco a year later. In 1987, a bidding war ensued between several financial firms to acquire RJR Nabisco. The battle became the subject of the popular business book Barbarians at the Gate. Enditem