Reynolds, Lorillard Say Federal Approval for $27.4B Deal Advancing

Source from:  journalnow.com 01/22/2015

Reynolds American Inc. and Lorillard Inc. said in a joint regulatory filing Tuesday they have achieved "certified substantial compliance" for additional regulatory information related to their proposed megadeal.

The companies announced July 15 Reynolds' $27.4 billion offer for Lorillard as part of a deal also involving two British tobacco manufacturers. Their shareholders are set to vote on the deal Jan. 28.

The companies have acknowledged fulfilling two Federal Trade Commission requests for additional information. They said they continue "to cooperate fully and engage in discussion with the FTC as it conducts its review of the proposed acquisition and divestiture."

Also Tuesday, Wells Fargo Securities analyst Bonnie Herzog raised her odds of the deal getting FTC approval from 70 percent to 80 percent. Most industry analysts have settled recently on 50-50 odds of approval.

Herzog said she believes the FTC could approve the purchase as soon as the March-April time frame.

By contrast, the companies said when they disclosed their proposed deal that they expected it could take as long as June 30. In Tuesday's filing, they stretched that deadline further, saying they have entered an agreement with the FTC for another 30 days if needed.

Michael Walden, an economics professor at N.C. State University, said he believes the companies are moving forward with the meetings "to strengthen their hand by showing the approval of shareholders."

Lorillard shareholders will be asked to approve the deal.

Reynolds shareholders will be asked to approve the recommendation of issuing shares of Reynolds common stock to Lorillard shareholders, giving them a 15 percent stake in Reynolds. They also will vote on issuing additional Reynolds stock to British American Tobacco Plc so that BAT will maintain a 42 percent ownership stake in Reynolds.

If those votes are approved, Reynolds public shareholders would own 43 percent of the company.

The selling of Lorillard's blu eCigs and four cigarette brands (Kool, Maverick, Salem, Winston) to Imperial Tobacco Group Ltd. may be enough to ease regulatory concerns about Philip Morris USA (50.7 percent) and Reynolds (33 percent) having combined about 84 percent market share. Reynolds has disclosed it may have to sell Doral to Imperial – at no additional reimbursement – to get FTC approval.

Imperial's U.S. market share, through its Commonwealth Brands subsidiary in Reidsville, is projected to go from 3 percent to 4 percent to between 10 percent and 12 percent.

Herzog said she raised the earnings projections for the Big 3 manufacturers (including Altria Group Inc.) based on "our increasingly bullish view on U.S. tobacco fundamentals."

She raised her Reynolds share price range by $10 to between $79 and $81, based primarily on her confidence of the deal getting regulatory approval. She cited Reynolds as her top industry pick. Reynolds' share price closed Tuesday up 94 cents to $68.51.

Lorillard's share price was raised by $5 to $69 to $71, which is in line with the current deal value for Lorillard. Its share price closed Tuesday up 35 cents to $65.56.

For Altria, Herzog raised her share-price range also by $10 to $56 to $58. Its share price closed Tuesday up 78 cents to $53.83.

Besides the Reynolds-Lorillard deal, Herzog said her industry optimism is based also on consumers having more disposable income because of lower gas prices, and the growing popularity of electronic and vapor cigarettes as the industry awaits further, if any, Food and Drug Administration regulations.

"We believe the pending deal will benefit the industry, helping to sustain a rational pricing/competitive environment - ultimately driving even greater pricing power for manufacturers," Herzog said.

"The industry is entering its next generation of growth, as we continue to believe reduced risk/vapor products will accelerate the growth of the combined profit pool over the next decade."

If Reynolds is able to gain Lorillard's Newport cigarette brand – the top-selling U.S. menthol brand and the No. 2 brand overall, Herzog said Reynolds "would be the crown jewel of the industry with three of the top four U.S. cigarette brands (counting No. 3 Camel and No. 4 Pall Mall) and Vuse."

Susan Cameron, Reynolds' chief executive, and other Reynolds officials tout Vuse as "a game changer" for the industry and the reason why Reynolds was willing to include blu eCigs in the deal with Imperial. Enditem