Reynolds Starts Private Funding Steps

Source from:  Winston-Salem (NC) Journal 06/08/2015

Reynolds American Inc. is prepping to take another significant financial step toward completing its $29.3 billion offer for Lorillard Inc.

A key part of the offer involves Reynolds agreeing to assume Lorillard debt, valued at $3.5 billion.

Reynolds said Friday it is preparing to begin exchange offers - via a private offering - for $3.5 billion in senior loans.

What that means is Reynolds is stating the terms of how its R.J. Reynolds Tobacco Holdings Inc. subsidiary would assume seven sets of Lorillard senior loans with due dates ranging from 2016 to 2041.

Reynolds would issue its own senior debt in the transaction. The current interest rates range from 2.3 percent to 8.125 percent, with individual loan amounts ranging from $250 million to $750 million.

The manufacturers remain confident the deal will close by June 30. Reynolds is essentially buying Newport, the top-selling U.S. menthol brand and No. 2 overall brand.

The Federal Trade Commission, by a 3-2 vote, preliminarily approved Reynolds' offer and plan to divest four traditional and one electronic cigarette brands to the U.S. subsidiary of Imperial Tobacco Group Plc for $7.1 billion.

The FTC is currently in a 30-day public-comment period. The agency said it would decide June 25 whether to make its consent agreement final.

The manufacturers also must gain approval from a federal District Court to sell the five brands to ITG Brands.

Reynolds spokesman David Howard said the announcement "signifies our intent of how we propose proceeding with the Lorillard notes while we wait on the court decision."

"Once the court gives its consent, it would kick in proceeding with the exchange offer."

If the FTC and federal court consents are given, Philip Morris USA (51 percent) and Reynolds (34 percent) would control 85 percent of the U.S. marketplace.

The key to the FTC's decision was the acceptance by the majority of panelists of Reynolds and Lorillard's divestiture package. Imperial would buy Reynolds' Winston, Salem and Kool brands, Lorillard's Maverick brand and Lorillard's blu eCigs.

Imperial also gains Lorillard's Greensboro headquarters and the bulk of its 2,900-person workforce, including about 1,400 in Greensboro.
Imperial expects to grow its U.S. traditional cigarette market share from 3 percent to 10 percent with those brands, while some analysts say it could reach as high as 12 percent.

By comparison, when Reynolds bought Brown & Williamson Tobacco Corp. in 2004 - also combining the No. 2 and No. 3 manufacturers - Lorillard had an 8.4 percent market share. That market share since has nearly doubled to 15 percent. Enditem