The Next British Invasion?

Reynolds, Lorillard top contenders as British American Tobacco looking for U.S. acquisitions

British American Tobacco BAT (CSP Daily News / Convenience Stores)

LONDON -- British American Tobacco plc (BAT) has hired financial advisers to look at acquisition opportunities in the United States, including Reynolds American and Lorillard, reported The Times of London.

BAT has hired Deutsche Bank to work alongside the company's financial adviser on how it should pursue and finance U.S., according to the report, which cites unnamed sources.

The report continues to add fuel to the speculation that change is afoot at Reynolds and possibly Lorillard, the No. 2 and No. 3 tobacco manufacturers in the United States, said a report by The Triad Business Journal.

BAT already owns a 42% stake in Reynolds, and a 10-year standstill agreement between the two companies expires at the end of July. At that point, BAT could try to increase its stake in Reynolds without approaching the Reynolds board, and industry observers have been questioning whether BAT will try to increase its stake at that point, the report said.

Rumors also began swirling earlier this year that a potential $20 billion deal between Lorillard and Reynolds was in the works.

Analyst speculation has centered on the departure of Daniel Delen and return of Susan Cameron (Ivey) as CEO.

With Cameron back in the CEO seat, some have said it also sends signals that a strategic partnership could be in the works between Reynolds and BAT. Cameron was the top executive of BAT's U.S. subsidiary, Brown & Williamson, before it was bought out by Reynolds a decade ago. She then landed in the top spot at Reynolds, said the report.

Click here to read the full Triad Business Journal report.

Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC, New York, said recently that given Cameron's prior tenure with BAT 20 years before the combination of R.J. Reynolds and Brown & Williamson (B&W) in 2004, "We believe this could increase the chances for and signals a potential strategic partnership with BAT. Furthermore, we continue to believe the chances are great that RAI could acquire [Lorillard]."

Speculation erupted in March that Reynolds would make a bid for Lorillard, priced as high as $22 billion. The companies declined to comment on the rumor.

Nik Modi, analyst with RBC Capital Markets, Chicago, agreed with Herzog, pointing out that Cameron is "known for her savvy integration during key M&A transactions."

Greensboro, N.C.-based Lorillard, through its Lorillard Tobacco Co. subsidiary, makes the Newport cigarette brand, the top-selling menthol and second-largest selling cigarette in the United States. Its other cigarette brands include Kent, True, Maverick and Old Gold brand names. Lorillard, through its LOEC Inc. subsidiary, is also a leading U.S. electronic cigarette company with its blu eCigs brand.

Winston-Salem, N.C.-based Reynolds American is the parent company of R.J. Reynolds Tobacco Co. (cigarette brands include Camel, Pall Mall, Winston, Kool, Doral, Salem, Misty and Capri); American Snuff Co. LLC (smokeless tobacco brands include Grizzly and Kodiak); Santa Fe Natural Tobacco Co. Inc. (Natural American Spirit 100% additive-free natural tobacco products, including styles made with organic tobacco); Niconovum USA Inc. (nicotine replacement therapy products under the Zonnic brand); and R.J. Reynolds Vapor Co. (VUSE brand of e-cigarettes).

London-based BAT is the world's second-largest tobacco company by sales after Altria Group. It has a market-leading position in more than 50 countries and operations in around 180 countries. Its four largest-selling brands are Dunhill, Lucky Strike, Kent and Pall Mall, with others including Kool, Benson & Hedges and Rothmans.