Reynolds American Inc. (RAI) is acquiring Lorillard Inc. (LO) in a cash-and-stock deal worth about $25 billion, the Wall Street Journal reported.
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 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.
Susan Cameron, RAI’s president and CEO will continue in that role following the completion of the acquisition, and the company will remain headquartered in Winston Salem, N.C. Murray Kessler, Lorillard’s chairman, president and CEO will join RAI’s board after the closing of the transaction.
“Reynolds American and Lorillard have complementary core strengths and the addition of Newport to our operating companies’ existing key brand portfolios – including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly – will enhance our ability to compete in the combustible cigarette and smokeless categories,” said Cameron. “We are also confident in R.J. Reynolds Vapor Company’s digital vapor cigarette VUSE, which offers superior technology and has received very positive early results in its national rollout. This transaction will provide RAI with additional resources to invest in innovation, R&D and its operating companies’ brands. This will benefit adult tobacco consumers and wholesale and retail customers alike.”
“We are proud of Lorillard’s record of shareholder value creation and operational success, and we view this transaction, which provides a significant premium to our shareholders, as the culmination of our efforts,” said Kessler. “Importantly, we consider these transactions not only a win for our shareholders, but also a win for our customers, consumers and employees. We look forward to working with Reynolds American and Imperial to complete these transactions.”
“This is a great opportunity to transform our U.S. business and secure a significant presence in the world’s largest accessible profit pool,” said Alison Cooper, chief executive of Imperial Tobacco. “We plan to build a U.S. brand portfolio through national distribution and create a stronger, more competitive business. We intend to internationalize blu, the U.S. leader in e-cigarettes and enhance its growth opportunity with our know-how. We expect opportunities for cost optimization through integration. The acquisition of these assets, without historic product liabilities for the cigarette brands, on reasonable terms means that it is expected to offer a return of over 10%, well in excess of our cost of capital in its first full year and is expected to be significantly earnings enhancing in the first full year post completion. The value this will create for shareholders and the strategic transformation of our position in a key growth market, makes this an outstanding opportunity.”
After months of speculation that a merger was imminent, Wells Fargo Securities Analyst Bonnie Herzog weighed in on the announcement. “This morning it was announced that RAI and LO have entered into a combination agreement in a cash-and-stock transaction valued at $68.88/share for LO, or a total of $27.4B including the assumption of net debt (LO shareholders will receive $50.50 in cash/share and 0.2909 of an RAI share).”
“Importantly, RAI and British American Tobacco (BAT) have agreed to jointly pursue R&D of next generation products as BAT will retain its 42% share of the new combined entity. While the deal is largely structured as we expected, we were surprised that the price paid for LO was only $68.88 as we believe it is worth at least $72/share. Further, cost savings are larger than we anticipated and we were surprised to see the blu divesture. Therefore we anticipate that LO will trade down this morning by around $3-4/share with RAI trading down initially but encourage investors to take advantage of pullback to build positions in the name. Bottom line – we believe this is a value creating transaction for RAI and LO shareholders and sets the stage for an even stronger No. 2 player in the U.S.,” Herzog said.
Wells Fargo predicts that the transaction will be approved by the FTC within the next year.