Deals and IPOs

RJ Reynolds eyes Lorillard tobacco bid

Ed Hammond and Paul Murphy
Daniel Acker | Bloomberg | Getty Images

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.

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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.

Founded in New York in 1760, Lorillard controlled 11.7 percent of the North American tobacco market in 2012, according to Euromonitor, compared to RJR's 25 percent and Altria's 41.5 percent.

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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.

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BAT took its stake in RJR almost a decade ago. A standstill agreement preventing a hostile takeover by the UK group comes to an end in July.

Lorillard shares were up 4.5 percent to $51.27 in midday New York trading. Bonnie Herzog, an analyst with Wells Fargo Securities, said a "fair" price for RJR to offer could be "much higher" than $60.

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The combination would create a stronger competitor to Altria, the industry leader, she said, and could reap "substantial cost savings and synergies." However, she raised questions about how RJR would finance such a move, saying it could be structured instead as merger, or BAT could help finance a takeover.

Ms Herzog questioned whether RJR would want to wait for a clearer picture to emerge on the Food and Drug Administration's current reviews of the regulations on both menthol cigarettes and e-cigarettes.

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RJR merged with Nabisco Brands in 1985, and the group's name changed to RJR Nabisco a year later. In 1987, a bidding war ensued between several financial firms to acquire RJR Nabisco. The battle became the subject of the popular business book Barbarians at the Gate.

—By Ed Hammond and Paul Murphy, the Financial Times