Reynolds American, Lorillard Confirm Acquisition Talks; BAT Supports Deal

(RTTNews) - Tobacco company Reynolds American, Inc. (RAI) confirmed Friday its is in talks to acquire smaller rival Lorillard, Inc. (LO) as part of its strategy to enhance shareholder value. Reynolds American also confirmed that its largest shareholder, British American Tobacco plc or BAT (BATS.L, BTI), is participating in the talks.

London-based BAT, the maker of Kent and Dunhill cigarettes, noted in a separate release that it "expects to support the transaction by subscribing for additional shares in Reynolds American, with the aim of maintaining its existing 42% equity position in Reynolds American."

Bloomberg reported Thursday that Reynolds is nearing a deal to acquire Greensboro, North Carolina-based Lorillard with the approval of BAT. A deal may reportedly be announced as early as next week.

The deal would combine Reynolds cigarette brands such as Camel, Pall Mall and Kool, with Lorillard's top-selling Newport menthol cigarettes and electronic cigarettes.

It would enable Reynolds to gain a commanding position in the fast-growing market for electronic cigarettes that represents a growing alternative to traditional cigarettes. Reynolds already makes and markets VUSE e-cigarettes, a highly differentiated vapor product.

Lorillard, through its other subsidiaries, is also a leading global electronic cigarette company, marketed under the blu eCigs and SKYCIG brands.

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.

A potential merger of Reynolds American, the second-largest tobacco company in the U.S., and Lorillard, the third-largest, 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.

As part of the deal, Reynolds American and Lorillard are also in talks with London-based Imperial Tobacco Plc (IMT.L, ITYBY.PK) for the sale of certain of their assets and brands to it In order to assuage any anti-trust concerns that the U.S. government may have.

While confirming the talks earlier in the day, Imperial Tobacco said the U.S. remains one of the world's largest and most profitable cigarette markets and the company would proceed with an acquisition only if its terms met strict transaction criteria.

The three companies have said that there is no assurance that any agreement will be reached by any of the parties.

Meanwhile, BAT is also nearing a position where they can make an unsolicited offer for the Reynolds American's shares it does not already own, as its ten-year standstill agreement with Reynolds is set to expire in July.

RAI closed Thursday's regular trading session at $62.26, down $0.41 or 0.65% on a volume of 2.22 million shares, while LO closed at $63.09, up $0.08 or 0.13% on a volume of 3.96 million shares. Meanwhile, IMT.L settled on the LSE up 0.1% at 2,662.60 pence.