Weighing the Benefits

An independent Lorillard opens acquisition, cash-flow opportunities

GREENSBORO, N.C. -- Easier cash flow and freedom to innovatethese are among the advantages cigarette maker Lorillard Inc. should see upon completion of its spinoff from Loews Corp., according to tobacco analysts.

"In our opinion, the most appealing aspect of this spinoff will be Lorillard's ability to act as an independent company, without the 'confinement' of the Loews Corp. board," wrote New York City-based Citigroup analyst Bonnie Herzog in an investor note yesterday. "Lorillard will be free to make acquisitions using its own stock as currency [image-nocss] or conduct share buybacks as it sees fit."

As reported yesterday in CSP Daily News, Loews's board approved a plan to spin off its entire ownership interest in Lorillard to holders of its Carolina Group stock and Loews common stock in a tax-free transaction. As a result of the transaction, Lorillard, presently a wholly owned subsidiary of Loews, will become a separate publicly traded company.

The spinoff is expected to be completed in mid-2008.

"This announcement, while somewhat 'out of the blue,' should not come as a shock to investors, given that Loews has been shedding its holding of Carolina Group stock over the years and had not been eagerly expanding the business," Herzog wrote. "By spinning off Lorillard, Loews' risk profile should be improved, decreasing Loews borrowing costs."

Similarly, Nik Modi, stock analyst for UBS Investment Research, New York, wrote, "[The spinoff] erases the tracking stock overhang that has inhibited some investors from buying the stock, enables the company to use its balance sheet to return additional cash to shareholders in the form of buybacks, will create more visibility for the company (e.g., management road show) and makes it more likely for corporate activity (takeout or acquisitions)."

Added Herzog, "Post spin, Lorillard will no longer be under the 'control' of parent company Loews, and will be free to pursue its expansion plans and balance sheet restructuring (increased leverage for buybacks or acquisitions), Lorillard won't trade with a tracking stock discount, the new Lorillard stock may attract new investors previously turned off by the tracking stock nature of Carolina Group, and Lorillard will be debt free."

Following the spinoff, Martin L. Orlowsky will continue to serve as chairman, president and CEO of Lorillard, and Lorillard's corporate headquarters will continue to be in Greensboro, N.C.

Completion of the proposed transaction is subject to a number of conditions, including receipt of a favorable ruling from the Internal Revenue Service (IRS) and an opinion of tax counsel as to the tax-free nature of the transaction, Securities & Exchange Commission (SEC) clearance, the absence of any material changes or developments, final approval by the Loews board and market conditions. Approval by shareholders of Loews is not required.

Loews, a holding company, is one of the largest diversified corporations in the United States. Its principal subsidiaries are CNA Financial Corp.; Lorillard Inc.; Boardwalk Pipeline Partners LP; Diamond Offshore Drilling Inc.; HighMount Exploration & Production LLC; Loews Hotels; and Bulova Corp.

Lorillard is engaged, through its subsidiaries, in the production and sale of cigarettes. The principal cigarette brand names of Lorillard are Newport, Kent, True, Maverick and Old Gold. The company said Lorillard's largest-selling brand is Newport, the second largest-selling cigarette brand in the United States and the largest-selling brand in the menthol segment of the U.S. cigarette market.

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