Dueling Reynolds Deals

Reynolds pushes for end-of-month Lorillard deal amidst rumors of a British American Tobacco takeover

Melissa Vonder Haar, Freelance Writer

British American Tobacco

WINSTON-SALEM, N.C. -- For months, speculation has grown over a deal that would combine the second and third largest tobacco companies in the United States. Although two previously set deadlines for a Reynolds American Inc. purchase of Lorillard Inc. have passed, anonymous sources have told Bloomberg that Reynolds has a vested interest in completing a purchase of Lorillard Inc. by the end of the month: it is at the end of July that a ten year standstill agreement preventing British American Tobacco from increasing its current 42% stake in Reynolds expires, leaving Reynolds vulnerable to being taken over itself.

According to The Daily Mail, London-based British American Tobacco is willing to pay as much as $75 a share to purchase the remaining 58% of Reynolds stock, though neither company has confirmed such a deal is being discussed.

Wells Fargo senior analyst Bonnie Herzog acknowledged that, while a deal between Reynolds and British American Tobacco makes strategic sense, she believes that a merger of Reynolds and Lorillard remains more likely, citing the reinstatement of the previously retired Susan Cameron as CEO of Reynolds.

“We believe Susan Cameron's return to the helm of (Reynolds) was driven by the board's vision to have her lead the company into the next stage of growth,” Herzog wrote in a research note. “Not simply to help facilitate a sale transaction to (British American Tobacco) within a few months.”

“Even if a (British American Tobacco) and (Reynolds) deal were to occur, we continue to believe that ultimately a transaction to buy (Lorillard) will likely follow,” she said, adding that a combined British American Tobacco and Reynolds could pay up to $80 a share for Lorillard (though more likely in the mid-$70 range).

Earlier this week, CNBC reported that Reynolds could announce a Lorillard deal within a matter of weeks – potentially before the British American Tobacco “standstill” expires.