Bloomberg: Reynolds American Nears Deal To Buy Lorillard With BAT Nod

(RTTNews) - Tobacco company Reynolds American Inc. (RAI) is nearing a deal to acquire smaller rival Lorillard Inc. (LO) with the approval of British American Tobacco plc (BTI, BATS.L), Bloomberg reported Thursday, citing people with knowledge of the matter. A deal may reportedly be announced as early as next week.

Reynolds American is the second-largest tobacco company in the U.S., while Lorillard is the third-largest. A potential merger of the two companies would create a bigger rival to industry leader Altria Group, Inc. (MO), which boasts of a 50 percent share of the U.S. tobacco market.

London-based British American Tobacco or BAT, the maker of Kent and Dunhill cigarettes, owns 42 percent of Reynolds and will have to approve a merger.

A ten-year standstill agreement between British American and Reynolds is set to expire in July 2014, when British American can make an unsolicited offer for the Reynolds shares it does not already own. Bloomberg reported that expiration of the agreement could pave the way for the two companies to work closer together amid a broad push for industry consolidation.

In order to assuage any anti-trust concerns that the U.S. government may have, London-based Imperial Tobacco Group plc (ITYBY, IMT.L) will buy some brands from Reynolds and Lorillard, and is lining up about $7 billion for the purpose, Bloomberg reported.

Lorillard sells Newport menthol cigarettes and Blu electronic cigarettes. The company acquired SKYCIG, a British electronic cigarette business, in October 2013.

A potential deal would combine Reynolds cigarette brands such as Camel, Pall Mall and Kool, with Lorillard's top-selling Newport menthol cigarettes. It would also enable Reynolds to gain a commanding position in the fast-growing market for electronic cigarettes that represents a growing alternative to traditional cigarettes.

The global tobacco market is now seeing the rapid growth of electronic cigarettes and lower sales volumes of traditional cigarettes. The popularity of e-cigarettes have soared in recent times as tobacco products are highly regulated and heavily taxed. Further, cigarette smoking has been forbidden in public places.

More than 80 per cent of Lorillard's sales come from the Newport brand of menthol cigarettes, which have bucked a long-term decline in U.S. smoking rates. The wider U.S. cigarette market, with annual sales of about $100 billion, has been declining at a rate of 3 percent a year.

The makers of traditional tobacco cigarettes were banned by the FDA in 2009 from selling flavored cigarettes, except menthol, and from using cartoons in advertising for the products.

RAI closed Thursday's trading at $62.26, down $0.41 or 0.65 percent on a volume of 2.22 million shares. LO closed Thursday's trading at $63.09, up $0.08 or 0.13 percent on a volume of 3.96 million shares.