Reynolds, Lorillard Set Crowded Tobacco Deal Table

Imperial, BAT join U.S. companies in talks, seeking brands, shares, respectively

Greg Lindenberg, Editor, CSP

Reynolds American Lorillard Imperial Tobacco British American Tobacco (CSP Daily News / Convenience Stores / Tobacco)

WINSTON-SALEM, N.C. -- Bringing a long-rumored and much-anticipated deal or deals one step closer to reality, Reynolds American Inc. on July 11 issued a statement saying that it "confirms that it is in discussions with Lorillard Inc. regarding a possible acquisition of Lorillard."

Speculation has been persistent and growing since March that a merger between Winston-Salem, N.C.-based Reynolds and Greensboro, N.C.-based Lorillard could be in the works.

A combined Reynolds-Lorillard could create antitrust issues and require the companies to divest some of their brands. It would also have major implications for the burgeoning electronic cigarette market, as well as the menthol segment.

As reported in a 21st Century Smoke/CSP Daily News Flash, the Reynolds statement, as well as a similar one issued by Lorillard, followed a required legal disclosure by Imperial Tobacco PLC describing discussions among the tobacco companies.

Imperial Tobacco "confirms it is in discussions with Reynolds and Lorillard to evaluate a possible acquisition of certain assets and brands owned by Reynolds and Lorillard," it said. "Imperial would proceed with an acquisition only if its terms met strict transaction criteria."

Bristol, U.K.-based Imperial is lining up $7 billion to buy some brands that Lorillard and Reynolds would sell off to head off any concerns raised by the U.S. government, people with knowledge of the matter told Bloomberg. They said a deal could come within a week.

Bonnie Herzog, analyst with Well Fargo Securities LLC, New York, who has long championed the deal, said the brands that Reynolds would most likely divest would be Winston, Kool and Salem, and possibly Misty and Capri; Lorillard could divest Maverick, Kent and Old Gold. "However, we do question Imperial's ability to finance a transaction this large," she said.

British American Tobacco (BAT), Reynolds' shareholder, is participating in these discussions, Reynolds said.

In its own statement, London-based BAT said, "If such a deal were to proceed, British American Tobacco expects to support the transaction by subscribing for additional shares in Reynolds American, with the aim of maintaining its existing 42% equity position in Reynolds American."

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