Reynolds to pay $27.4 billion for Lorillard

July 15, 2014, 12:03 PM UTC
Reynolds Said to Aim for July Lorillard Deal as Talks Continue
Reynolds American Inc. Pall Mall brand cigarettes are displayed for purchase at a B & N Food Market convenience store in Bagdad, Kentucky, U.S. on Tuesday, July 8, 2014. Reynolds American Inc. is aiming to get a deal done to buy rival Lorillard Inc. by the end of the month, as the two companies pursue what has been an elusive agreement to combine the second- and third-largest tobacco producers in the U.S., people with knowledge of the matter said. Photographer: Luke Sharrett/Bloomberg via Getty Images
Photograph by Luke Sharrett — Bloomberg/Getty Images

Reynolds American (RAI) agreed to pay $27.4 billion to acquire Lorillard (LO), in a merger that will combine the second and third-largest U.S. tobacco companies as the industry struggles with a chronic decline in sales.

Under the terms of the deal, which has been approved by both board of directors, Reynolds American agreed to buy Lorillard in a cash-and-stock deal currently valued at $68.88. Shares of Lorillard, which has a market capitalization of about $24 billion, closed at just over $67 on Monday.

The stock has jumped since reports the companies were mulling a merger

The deal terms also include a divestiture, aimed at appeasing regulators. Reynolds American agreed to sell off several assets to the U.K.’s Imperial Tobacco Plc (ITYBY). Those brands include KOOL, Salem, Winston, Maverick and blu eCigs. Imperial is acquiring those assets for $7.1 billion in cash, and Reynolds American said it expects to receive net cash proceeds of about $4.4 billion after taxes.

Those assets are meant to make Imperial a stronger player in the U.S., where market leader Altria (MO) commands roughly half of the traditional cigarette market. If Reynolds and Lorillard were to combine as they currently exist, only two strong tobacco producers would exist. But with the asset sales, Reynolds claims Imperial’s U.S. operations will “more than triple its share of the U.S. cigarette market,” and thus “elevate it to the status of a major U.S. competitor for the first time.”

Some analysts, like Wells Fargo’s Bonnie Herzog, have touted the benefits of the deal. Herzog says the Reynolds-Lorillard combination creates a stronger second player to go head-to-head with Altria, as well as create a more rational environment for price actions. But with only two “powerful” cigarette companies, Herzog also says the industry may see stricter contracts and smaller players could be squeezed.

The assets being acquired by Imperial include Lorillard’s manufacturing and research and development facilities in Greensboro, N.C., and about 2,900 employees, including a national sales force.

Meanwhile, British American Tobacco Plc (BTI) will keep its 42% ownership of Reynolds through an investment of about $4.7 billion, based on Reynolds’ closing price of $60.16 as of July 2, the same price used to consider the stock portion of the Lorillard acquisition.

The combined Reynolds-Lorillard will be led by Susan Cameron and maintain its headquarters in Winston-Salem, N.C.

Cameron, the first woman to run a major tobacco company, rejoined the company earlier this year after previously serving as president and chief executive from 2004 to 2011. Lorillard Chief Executive and Chairman Murray Kessler will join Reynolds’ board after the deal closes.


Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.

Read More

Great ResignationInflationSupply ChainsLeadership