By MICHAEL J. DE LA MERCED and CHAD BRAY JULY 15, 2014 7:18 AM New York Times
Reynolds American agreed on Tuesday to buy its smaller rival, Lorillard, for $27.4 billion, uniting two of the country’s biggest tobacco producers in a bet that bigger is safer in a declining industry.
Under the terms of the deal, Reynolds will pay $68.88 for every Lorillard share.
Two other companies are also involved in the complicated transaction. The Imperial Tobacco Group plans to buy several billion dollars’ worth of brands — including Kool, Salem and Winston cigarettes and Blu e-cigarettes — from the combined company for $7.1 billion.
And British American Tobacco, which already owns 42 percent of Reynolds, will buy additional shares to maintain that same level of ownership in the combined company and help finance the deal.
The long-awaited combination, over a year in the making, will reshape America’s tobacco industry as companies grapple with a decadeslong drop-off in smoking. Buying Lorillard will make Reynolds a stronger competitor to the Altria Group, whose Marlboro brand alone accounts for nearly half of all cigarette sales in the United States.
Perhaps more important, the deal will also give Reynolds a foothold in two of the fastest growing products in the industry: menthols and e-cigarettes. Lorillard owns both Newport, the bestselling brand of menthols, and Blu, one of the leaders in the booming e-cigarette market.
And the sale of some brands will make Imperial, whose offerings include Galouises, the third- biggest cigarette maker in the United States. A deal involving Imperial had long been viewed as an important way to persuade antitrust regulators to approve of any merger of Reynolds and Lorillard.
Analysts have said that the four-way transaction could spur other mergers in the industry, particularly as established manufacturers seek to gain ground in e-cigarettes.
The outlook for traditional tobacco appears dimmer. Though still big — together, Reynolds and Lorillard reported $13 billion in sales last year — the number of Americans who smoke has fallen sharply over the last five decades. Government statistics show that just about 18 percent of adult Americans smoke cigarettes, compared to 43 percent from the same time in 1965.
And health advocates have succeeded in pushing for more stringent anti-smoking campaigns and limiting smoking in public places.
One potential hurdle for Reynolds is if the government cracks down on menthols, one of the fastest growing parts of the industry. The Food and Drug Administration has said that it considers that particular flavor of cigarette to be more harmful and signaled that it may seek greater restrictions on its sales.
Lazard is lead financial adviser to Reynolds, JPMorgan Chase and the law firm Jones Day are also advising Reynolds. Centerview Partners, Barclays and the law firm Simpson Thacher & Bartlett are advising Lorillard.