Reports: Reynolds American In Advanced Talks To Buy Lorillard

(RTTNews) - Tobacco company Reynolds American Inc. (RAI) is in advanced talks to buy smaller rival Lorillard Inc. (LO), according to media reports on Wednesday.

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.

U.K.-based British American Tobacco PLC (BTI, BATS.L), the maker of Kent and Dunhill cigarettes, owns a 42 percent stake in Reynolds and would likely have a major role in a potential deal between Reynolds America and Lorillard. 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.

The Financial Times had reported in early March that Reynolds American was exploring a bid for Lorillard in a deal that could value the target company at more than $20 billion. Reynolds was said to have hired investment bank Lazard to explore a potential deal.

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-developing 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.

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.

As of Wednesday, Reynolds American had a market capitalization of $32.04 billion, while Lorillard had a market capitalization of $22.71 billion.

RAI closed Wednesday's trading at $59.77, up $2.51 or 4.38 percent on a volume of 4.71 million shares. However, in after-hours, the stock declined $0.67 or 1.12 percent to $59.10.

LO closed Wednesday's trading at $62.63, up $5.90 or 10.40 percent on a volume of 6.67 million shares. In after-hours, the stock further gained $0.17 or 0.27 percent to $62.80.