Wells Fargo Expects Lorillard, Reynolds American Inc. Combination

Puts chances of acquisition at 80% probability.

Wells Fargo Securities LLC reported this week that it continues to anticipate that Reynolds American Inc. (RAI) will acquire Lorillard (LO).

“We increasingly believe the chances are high (80% probability) RAI could acquire LO, and based on our updated acquisition analysis, RAI could pay up to $80/share for LO, incorporating synergies of $400MM,” Wells Fargo predicted.

It noted that synergies include: manufacturing (potentially closing either LO’s or RAI’s plant); leveraging RAI’s U.S. e-cig manufacturing and co-development of future generations of e-vapor products; and sales force and other headcount reductions.

“We think RAI could act preemptively by involving a third party in its potential acquisition of LO to address any potential FTC anti-trust issues. We believe RAI is likely to divest brands (Kool, Winston and Salem—5% total market share) and could be ‘shopping’ them already to one of the existing manufacturers that have 2-4% share creating a third viable player,” Wells Fargo reported.

Wells Fargo believes the acquisition could be imminent for several reasons: “We don’t believe the menthol overhang is a roadblock and actually think a deal could make more sense before (and IF) the FDA makes a potential recommendation on menthol; and we believe Susan Cameron was enticed out of retirement to take RAI to its next level of growth and not just maintain the company’s existing strategic direction. Further, since Cameron has given a 2-3 year commitment to running RAI, we think this could suggest a deal needs to happen sooner rather than later,” the company noted.




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