Lorillard, with a history older than the U.S. itself, is to give up its independence after 254 years.
Photograph by Luke Sharrett — Bloomberg/Getty Images
By Laura Lorenzetti
July 11, 2014

Imperial Tobacco Group is in talks to purchase assets likely to be divested from a Reynolds American and Lorillard combination, driving consolidation across the global tobacco industry, the company said Friday.

Reynolds (RAI) has been in talks to purchase Lorillard (LO), a deal that would merge the No.2 and No.3 U.S. cigarette makers. As part of the discussion, the companies have considered selling off some brands to avoid potential antitrust concerns.

Imperial Tobacco, a UK-based cigarette maker and the world’s fourth-largest tobacco group, is looking to expand in the U.S. market where tobacco sales are expected to reach $113 billion this year, according to data from Euromonitor. Imperial Tobacco’s cigarette brands such as Lambert & Butler and Davidoff accounted for 4.5% of the U.S. market in 2013.

While the Reynolds-Lorillard merger talks had been reported since May, Reynolds confirmed Friday that is is in discussions about a possible business combination with Lorillard.

Such a tie-up would combine Reynold’s famous Camel and Pall Mall brands with Lorillard’s menthol cigarette brand Newport. Reynolds may sell off smaller brands such as Winston, Kool and Salem to mollify antitrust authorities and help fund its takeover of Lorillard.

Such a merger is expected to be immediately accretive, and Reynolds could offer about $75 a share, a 20% premium to Lorillard’s July 10 closing price, making the deal total worth over $27 billion, according to analysis by Wells Fargo.

Reynolds would also take on Lorillard’s popular blu electronic cigarette brand, giving the company a strong position within the growing electronic cigarette market. Blu has about half of the market share in U.S. gasoline and convenience stores.

“Bottom line, this transaction in our view will be very positive for the global tobacco industry,” Bonnie Herzog, managing director at Wells Fargo Securities, wrote. “And could be just the beginning of future transactions with e-cigs/vapor being the underlying catalyst.”

There would be one last hurdle Reynolds needs to cover to make the acquisition happen: gaining British American Tobacco’s approval, which owns a 42% share of Reynolds.

Reynolds said BAT is participating in the merger discussions and plans to subscribe for additional shares to maintain its existing equity position if the transaction proceeds.

WATCH: Tobacco giants Reynolds and Lorillard in merger talks

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