RJ Reynolds, the US tobacco giant, is exploring a bid for rival cigarette-maker Lorillard, shaking up the global tobacco market at a time when it is being reshaped by falling smoking rates and the growth of electronic cigarettes.
More than 80 percent of Lorillard's sales come from the Newport brand of menthol cigarettes, which have bucked a long-term decline in U.SS smoking rates. The wider American cigarette market, with annual sales of $90 billion, has been shrinking at a rate of 3 percent a year.
Lorillard, whose other brands include Maverick, Old Gold and Kent, has a market value of $18.7 billion and was an early mover into e-cigarettes, buying the Blu brand in 2012 for $135 million.
Analysts estimate e-cigarette sales reached $2 billion last year, three times 2012's figure, but with no federal regulations governing the nascent market yet, the e-cigarette industry faces a patchwork of conflicting local rules.
RJR has appointed Lazard, the investment bank, to explore the deal, according to people familiar with the situation. None of the parties involved were immediately available for comment.
The exact value of an RJR bid could not be ascertained, but any offer would be likely to value the company at over $20 billion, people familiar with the matter added. It is unclear if RJR, which produces Camel, Pall Mall and Kool cigarettes, is planning to bid for all of Lorillard, or part of it. No deal is certain, these people stressed.
If it goes through, the deal would be the largest in the tobacco industry for many years. It would also see British American Tobacco taking a major role, as the UK group–which has a far smaller U.S. market share–owns 42 percent of Reynolds.