FT: Reynolds American Mulls Takeover Bid For Lorillard

(RTTNews) - Tobacco company Reynolds American, Inc. (RAI) is exploring a bid for smaller rival Lorillard Inc. (LO) in a deal that could value the target company at more than $20 billion, the Financial Times reported Monday, citing people familiar with the matter.

However, the Financial Times or FT reported that it was not clear if Reynolds American, the second-largest tobacco company in the U.S., was planning to bid for all of Lorillard, acquire part of it, or seek a merger. Reynolds, the owner of brands including Camel, Pall Mall and Kool cigarettes, is said to have hired investment bank Lazard to explore the deal.

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.

Winston-Salem, North Carolina-based Reynold's acquisition of Lorillard, the third-largest U.S. tobacco company by revenue, would create a bigger rival to Altria Group Inc. (MO), which boasts of a 50 percent share of the U.S. tobacco market.

As of Monday, March 3, Reynolds had a market capitalization of $28.61 billion, while Lorillard's had a market capitalization of $19.42 billion.

In mid-February, Lorillard reported a 5 percent decline in profit for the fourth quarter from last year, reflecting higher costs and expenses that offset an increase in sales.

In the cigarettes segment, Lorillard's net sales for the quarter rose 1 percent from the year-ago period primarily due to higher average net cigarette selling prices, partly offset by lower cigarette unit sales volume. Meanwhile, electronic cigarettes segment net sales for the quarter surged 39 percent from the prior-year period.

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

On the other hand, Reynolds American reported a profit for the fourth quarter that more than doubled from last year, reflecting higher cigarette and moist-snuff pricing as well as improved operating margins that helped offset lower cigarette volumes.

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 $90 billion, has been declining at a rate of 3 percent a year.

In late September 2013, Attorneys General of 40 U.S. states urged in a letter addressed to the U.S. Food and Drug Administration to regulate e-cigarettes like tobacco, as there has been a drastic increase in use of the product by children and youth who want to experience the effects of nicotine.

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

RAI closed Monday's trading session at $53.29, up $2.46 or 4.84 percent on a volume of 9.99 million shares.

LO closed Monday's regular trading session at $53.61, up $4.55 or 9.27 percent on a volume of 25.71 million shares. In after-hours, the stock further gained $0.09 or 0.17 percent to $53.70.