Lorillard Deal Could Boost Reynolds Profits

Source from:  Winston-Salem (NC) Journal 09/15/2015

The proposed combination of Reynolds American Inc. and Lorillard Inc. could produce an 18 percent boost in profit for Reynolds once the companies complete the divesting of certain brands and products.

The companies issued Monday a regulatory filing that provided financial estimates for their combined performance for fiscal 2014 through Sept. 30, and for fiscal 2013.

Reynolds said July 15 it has offered $27.4 billion purchase to buy rival Lorillard, essentially to gain top U.S. menthol brand Newport. The companies' management teams have expressed confidence they will gain federal regulatory approval for the deal, which they project closing by June 30, 2015.

The companies have set a merger end date of July 15, 2015, which would automatically be extended by six months "if the only conditions under the merger agreement that have not been satisfied or waived relate to antitrust regulatory matters."

The companies agreed that as part of the overall deal, they would sell to Imperial Tobacco Group Plc the cigarette brands of Kool, Salem and Winston from Reynolds and Maverick from Lorillard, as well as Lorillard's U.S. top-selling blu eCigs electronic cigarette brand. Reynolds has indicated in merger-related filings since October that its Doral cigarette brand may be required to be included in the Imperial transaction.

In the regulatory filing, Reynolds reported $1.32 billion in net income through Sept. 30 of fiscal 2014, while Lorillard had $860 million. Once the brand divestitures are stripped out, the companies said they would have had a combined $1.62 billion in net income.

In terms of net sales, Reynolds had $6.34 billion and Lorillard $5.22 billion in the same time period. When the brand divestitures are excluded, they would have had a combined $8.41 billion in net sales.

For fiscal 2013, the combined net income would have been $2.06 billion - up 16.6 percent from Reynolds alone - once the brand divestitures are excluded, along with sales of $10.8 billion.

Considering 80 percent of Lorillard's fiscal 2013 sales came from menthol cigarettes, adding Newport to Reynolds' portfolio would have raised menthol sales to 50 percent of its overall fiscal 2013 sales.

Imperial has committed to paying $7.1 billion for the brands, as well as to acquire Lorillard's headquarters and production operations in Greensboro, its plant in Danville, Va., and the vast majority of its 2,900 workforce.

The divestiture goal is bolstering Imperial enough to convince the Federal Trade Commission that it would be a competitive No. 3 U.S. manufacturer, raising it from a 3 percent market share to at least 10.3 percent.

Reynolds said Oct. 21 it is responding to a second request for additional information from the FTC.

Susan Cameron, Reynolds' chief executive, said in October that the second FTC request was expected and "there have been no surprises in the requests we've received. The process is proceeding smoothly." Murray Kessler, Lorillard's chief executive, made similar comments about the regulatory process.
However, some analysts rate the chance of approval at less than 50 percent.

The filing contained additional preliminary shareholder meeting details, although neither company has set a voting date.

For instance, each company would have to pay a $740 million termination fee to the other if certain agreements are not kept.

Other potential termination fees would include: $210 million from Imperial to Reynolds if Imperial does not hold up its end of the four-way deal; BAT getting up to $30 million from Reynolds if Lorillard terminates the deal, or $8.5 million from Reynolds if Imperial terminates the deal. Enditem