Reports suggest Reynolds American interested in buying Lorillard
Speculation of a potential Reynolds American Inc. purchase of rival tobacco manufacturer Lorillard Inc. resurfaced today as two British media outlets reported Reynolds could offer $18 billion to $22 billion in a deal.
“Per company policy, we do not comment on rumors or speculation,” Reynolds spokesman Bryan Hatchell said today.
Lorillard could not be reached for immediate comment.
Betaville blogger Ben Harrington said Reynolds’ initial offer is about $60 a share, which would represent a 22 percent increase from Lorillard’s opening share price today of $49.06. Its 52-week share price range is $37.95 to $53.27, which means Reynolds would be buying on the higher end of the scale.
“However, Lorillard is understood to have rebuffed Reynolds’ initial advances and is holding out for at least $62 a share,” Harrington said.
The impact of such a deal could be significant in the Triad given that between 2,000 and 2,220 of Reynolds’ 4,800 employees are based in Forsyth County, and Lorillard has about 2,800 employees, the bulk of which are based in Greensboro. Reynolds has a high number of sales representatives in the field.
A Reynolds offer for Lorillard likely would face major scrutiny from the Federal Trade Commission on antitrust concerns since it would combing the No. 2 and No. 3 U.S. tobacco manufacturers.
The speculation quickly spilled over to the New York Stock Exchange.
On a day in which the stock market has fallen more than 1 percent because of worries over Russia invading the Ukraine, Lorillard’s share price was up 8 percent, or by $3.94, to $53 as of 1:45 p.m. Reynolds’ share price was up 2.5 percent, or $2.51, to $53.34.
There has been talk of Reynolds buying Lorillard for several years, particularly heating up in October 2008 when Reynolds moved its menthol brand Kool from the growth category – getting the most marketing support – to the support category. Camel and Pall Mall are the only Reynolds cigarette brands in the growth category.
Reynolds acquired the U.S. rights to Kool as part of its $4.4 billion purchase of Brown & Williamson Tobacco Corp. in July 2004. Kool was the No. 3 menthol brand in the U.S. before Reynolds decreased its marketing.
Bonnie Herzog, an industry analyst with Wells Fargo Securities, considered the British media reports credible enough to issue a four-paragraph alert to investors.
“Though we have long believed Lorillard may combine with another tobacco company, and this has been part of our long-term bullish thesis on the stock, we question the timing of this since we’d think Reynolds would wait for further clarity on the FDA’s potential recommendation on menthol regulation, and e-cig regulation to a lesser extent, before pursuing a deal,” Herzog said.
However, Herzog said she understands the timing could be ripe as well considering “Lorillard and Reynolds together would be stronger to compete against industry leader Altria Group Inc.”
She also said a combined company could gain “substantial cost savings and synergies, and the general tobacco environment could become more rational.”
“Therefore, we think a fair takeout price would be much higher than the $60 Reynolds is rumored to be offering,” Herzog said.
Herzog cautioned about how Reynolds would pay for such a deal, which could lead the transactions to be more of a merger of equals than outright purchase.
The Financial Times’ Alphaville website provides trading chatter about issues and publicly traded companies that could affect stock markets in the United States and United Kingdom.
Lending credence to the Alphaville’s speculation about Reynolds: In November 2009, it was first to report on Reynolds’ interest in buying Swedish biopharmaceutical company Niconovum a day ahead of U.S. media sources. Reynolds announced its plans to buy Niconovum and its nicotine-replacement therapy products on Dec. 2, 2009.
The chatter cited another influential element: the growing speculation that British American Tobacco (BAT) could be preparing to acquire enough shares of Reynolds to assume ownership after a 10-year moratorium on buying Reynolds stock ends July 30.
BAT owns 42.04 percent of Reynolds’ stock, and controls five Reynolds board seats, as part of the payment it received for selling Brown & Williamson. That deal was completed July 30, 2004.
Herzog said she’s also paying attention to the possibility of BAT buying enough Reynolds stock to control ownership and convert Reynolds into a U.S. subsidiary.
“While we believe the most likely scenario is that BAT and Reynolds could reach a strategic partnership to market/sell e-cigs globally, we wouldn’t rule out BAT taking a majority stake,” Herzog said.
“Furthermore, if this occurs, BAT could help finance a potential acquisition of Lorillard.”
Herzog said the manufacturers may chose not to wait on the FDA to complete its review on menthol cigarettes since it could be a year or more before it opts to provide additional regulatory standards, if any. The industry also is waiting on the FDA to regulate e-cigs and other recent smokeless tobacco innovations.
“We believe the FDA could ultimately use its authority in this area to limit levels of menthol in combustible cigs over time but we do not envision a ban on menthol,” Herzog said.
Lorillard owns about 40 percent of the U.S. menthol market share through its top-selling Newport brand, while Reynolds holds about 26 percent through Kool and the growth in Camel and Pall Mall menthol styles.
“If an agreement were to be reached between Lorillard and Reynolds, we believe the Federal Trade Commission would ultimately approve a deal/combination, taking cues from the beer industry though it’s likely brands would need to be divested,” she said.
In April 2012, Lorillard Inc. made the first e-cig splash for the Big 3 tobacco manufacturers by spending $135 million to buy blu E-Cigs of Charlotte. Blu E-Cigs has since become one of the top two selling brands, along with Njoy, in part because of a major marketing push by Lorillard that includes television ads.
Meanwhile, Reynolds has launched an internally developed e-cig, Vuse, which it has in test markets in Colorado and Utah in anticipation of a nationwide launch in the second half of the year.