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Reynolds American to buy Lorillard in $27.4 bn deal

US tobacco giant Reynolds American will buy smaller rival Lorillard in a $27.4 bn cash-and-stock deal, the companies say
US tobacco giant Reynolds American will buy smaller rival Lorillard in a $27.4 bn cash-and-stock deal, the companies say

US tobacco giant Reynolds American will acquire rival Lorillard to create a behemoth aimed at conquering the growing e-cigarette market, the companies announced Tuesday.

Reynolds, the second-biggest US tobacco producer with its Camel and Pall Mall brands, will buy the US number-three Lorillard for $68.88 per share in a deal worth $27.4 billion, including debt, the companies said.

The two companies also plan a major divestment of assets to British firm Imperial Tobacco. Following the completion of the Reynolds-Lorillard deal, Imperial will acquire leading Reynolds and Lorillard brands, including Kool, Salem, Winston and Blu, an e-cigarette.

Imperial will pick up Lorillard's manufacturing and research site in Greensboro, North Carolina, which includes 2,900 employees.

The combination of Reynolds American Inc. the second-largest US tobacco company, with number-three Lorillard will create a company with over $11 bn in revenues and about $5 bn in operating income
The combination of Reynolds American Inc. the second-largest US tobacco company, with number-three Lorillard will create a company with over $11 bn in revenues and about $5 bn in operating income

Imperial, the maker of Gauloises and Davidoff cigarettes, will pay $7.1 billion in cash for the assets.

Reynolds will receive $4.4 billion after taxes from the Imperial deal, which is contingent on the closing of the Reynolds-Lorillard transaction.

The divestment is intended to enable antitrust approval as both Lorillard's Blu and Reynolds's VUSE brands are e-cigarettes.

Under the terms of the cash-and-stock agreement, Lorillard shareholders will receive, for each Lorillard share, $50.50 in cash and 0.2909 of a share in RAI stock at the closing of the transaction.

That represents a premium of 40.4 percent to the share price on February 28, before initial media speculation on a possible tie-up.

The addition of the popular Newport brand and other Lorillard holdings "will enhance our ability to compete in the combustible cigarette and smokeless categories," said Reynolds chief executive Susan Cameron.

Camel cigarettes, manufactured by Reynolds Amercian, are displayed at a tobacco shop on July 11, 2014 in San Francisco
Camel cigarettes, manufactured by Reynolds Amercian, are displayed at a tobacco shop on July 11, 2014 in San Francisco

British American Tobacco, Reynolds's largest shareholder, backed the deal and will maintain its 42 percent stake through an investment of about $4.7 billion in Reynolds.

Lorillard shareholders will hold 15 percent of the new combined company, which will have more than $11 billion in revenues and about $5 billion in operating income, the firms said.

Cameron will retain the chief executive post in the new company. The deal is expected to close in the first half of 2015.

Wall Street's reaction to the deal was disappointment. In early-afternoon trade, Reynolds dropped 4.3 percent to $60.02, while Lorillard sank 8.2 percent to $61.68.

RBC Capital Markets analyst Nik Modi rated the transaction price a "positive" for Reynolds given that RBC viewed $70-per-share a "takeout price" for Lorillard.

On the downside, RBC said a pledge by Reynolds for annual cost-savings of $800 million came in below the $900 million expected.

-Growing e-cigarette market-

Tuesday's deal could remake the US tobacco market, one of the world's most important with annual sales of more than $90 billion in 2013, according to Euromonitor.

Reynolds currently holds 25 percent of the US market, while Lorillard has 15 percent. Rival Altria, owner of the popular Marlboro brand, holds about 50 percent of the market.

To compete with Altria, which has been slower than some peers to enter e-cigarettes, Reynolds is eyeing stronger growth in e-cigarettes and cigars.

Packages of Lorillard's Newport cigarettes are displayed at a tobacco shop on July 11, 2014 in San Francisco
Packages of Lorillard's Newport cigarettes are displayed at a tobacco shop on July 11, 2014 in San Francisco

Reynolds plans to heavily promote its VUSE "vapor product" brand of e-cigarettes and will develop new brands in the growing segment with British American Tobacco.

Cameron said the VUSE line "offers superior technology and has received very positive early results in its national rollout."

The e-cigarette business continues to gain global market share and accounted for $7 billion in sales last year, said Euromonitor. The market could get as high as $50 billion in 2030, Euromonitor said.

The growth in e-cigarettes, which deliver nicotine in a vapor rather than smoke, comes as conventional cigarette sales drop amid tight consumer spending and health concerns.