By Michael Calia
Reynolds American Inc. agreed to acquire Lorillard Inc. in a
cash-and-stock deal worth about $25 billion, the companies said
Tuesday.
The deal combines Reynolds' Camel and Pall Mall cigarettes with
Lorillard's popular Newport menthol brand to create a more powerful
No. 2 to U.S. industry leader Altria Inc., maker of Marlboro.
Reynolds expects to have more than $11 billion in revenue and about
$5 billion in operating income after the deal.
Additionally, Reynolds American said it reached a deal to sell
the Kool, Salem, Winston, Maverick and Blu eCigs brands and other
assets to Imperial Tobacco Group PLC for $7.1 billion in cash.
Reynolds said it expects to receive $4.4 billion in proceeds after
taxes. Selling the brands is aimed at easing the antitrust scrutiny
that the deal may face.
The potential combination comes as tobacco majors try to
increase scale and cut costs amid a yearslong decline in U.S.
cigarette consumption, including an estimated 4% contraction last
year, even as profits remain robust. Two rare pockets of growth in
the $100 billion U.S. tobacco market are e-cigarettes and menthol
cigarettes. Lorillard is the market leader in both.
Under the terms, Lorillard shareholders will receive $50.50 in
cash and 0.29 Reynolds shares in exchange for each Lorillard share,
a value of $68.88 per share. Including the assumption of debt, the
deal is valued at $27.4 billion, the companies said.
The potential tie-up faces significant risks, including tough
antitrust scrutiny. The U.S. Food and Drug Administration is also
weighing a possible crackdown on menthol cigarettes, which fuel
more than 80% of Lorillard's sales, after the agency banned all
other cigarette flavors in 2009.
Reynolds and Lorillard have a combined stock-market
capitalization of more than $50 billion. Altria has roughly 50% of
the U.S. cigarette market. Reynolds and Lorillard have roughly 25%
and 15% U.S. market shares, respectively, before any
divestitures.
Lorillard's crown jewel is Newport, whose share of the U.S.
cigarette market rose from 9.7% in 2008 to 12.2% last year,
trailing only Marlboro, according to Euromonitor. The leading
menthol brand also skews younger than most brands, giving Lorillard
a 22.5% share of consumers aged 18 to 25, RBC Capital Markets
recently estimated.
Imperial Tobacco, which has around a 3% share of U.S. cigarette
sales, largely behind its USA Gold discount brand, is being
enlisted to allay antitrust concerns and help finance the deal.
Write to Michael Calia at michael.calia@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires