Lorillard's Growing Up

Spinoff could give menthol giant new areas of distribution and market penetration

GREENSBORO, N.C. -- It's that nervous moment when the child you've raised is moving out on his own, taking those first post-pubescent steps toward independence. Much has been penned over the past two years about Altria Group's pending spin off of Philip Morris USA, maker of the nation's top-selling Marlboro brand. But the tobacco industry is facing another significant spinoff, that of the country's third largest tobacco maker and producer of its largest menthol brand, Newport.

Next week, the Loews Corp. will formally spin off its entire interest in Lorillard Inc. to the Carolina Group [image-nocss] in a tax-free transaction that will make Lorillard a publicly traded company. The new entity will be traded as LO on the New York Stock Exchange as of June 10.

From a structural perspective, the transition is expected to be seamless with Martin Orlowsky continuing as Lorillard's chairman, president and chief executive officer, and the company 's corporate headquarters remaining in Greensboro, N.C.

With menthol capturing greater market share in the premium cigarette business–paced by Newport as well as more recent investments by Philip Morris USA and Reynolds American–the spinoff should make Lorillard even more formidable, says UBS tobacco analyst Nik Modi.

"There are lots of share gain opportunities," Modi told CSP Daily News, adding that Newport's top share in menthol comes even though it is the least promoted brand among the mainstream cigarette brands and carries the highest price point in the segment.

"While we remain of the view that Lorillard is the best strategic asset across global tobacco, we still see value in the name on a pure fundamental basis," Modi writes in his research note. "If we exclude the M&A component of our blended valuation exercise, we estimate CG [Carolina Group] shares would be worth $89 (still +25% total return)."

He added he expects the company to outpace its "conservative" Earnings per Share estimate of 5% to 7%.

This Thursday, Modi will offer his complete assessment of the Lorillard spinoff in an Exclusive CSPNetwork Tobacco Update cyberconference. To register, click here.

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