Reynolds American to Buy Lorillard for $27.4 Billion

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.


#1 Copenhagen Charlie on 07.15.14 at 8:57 AM

Well today is historic. What a way for all those wonderful people in Greensboro to wake up to news like this. Times change. Wish you all the best with a smooth transistion!

#2 Copenhagen Charlie on 07.15.14 at 9:00 AM

Imperial put up some cash and Blu will be a part of the Commonwealth portfolio not Reynolds.

#3 7.15.14 on 07.15.14 at 9:02 AM


#4 Candy Girl on 07.15.14 at 12:12 PM

Imperial now owns the e-cig IP, having paid $75 million for it and, should this deal get consummated, will own arguably the largest e-cig brand in the US; with Blu rapidly growing in the EU. Proposed sale of Blu to ITG not surprising, given that RAI and LO had separate e-cig regulatory strategies when it came to influencing the FDA and the pending US regs. This leaves RAI with Vuse and places Blu in the ITG portfolio where I would expect that it will be assigned to Fontem Ventures- the vapor sub of ITG.

#5 OTP Kid on 07.15.14 at 12:53 PM

Imperial got snookered with Blu. The product is rapidly declining in sales, ask any retailer. Ecigs are all in decline and blu has the most to lose. Vaping is killing it

#6 Candy Girl on 07.15.14 at 2:31 PM

In the last 6 months Blu has expanded its Vapor-related offerings. Expect to see more of this. It’s actually RAI that is resistant to the full array of vaping products and accesories- which is why it was happy to part with the brand. Altria and RAI are urging the FDA to restrict the category to the greatest extent possible- leaving VUSE, MARK TEN and Green Smoke on the shelves to benefit.

#7 Bucky on 07.16.14 at 3:04 AM

Yes its true that blu is in the liquid business. OTP kid its true and coming soon to the US.

#8 Copenhahen Charlie on 07.16.14 at 3:19 PM

well that guy did it again is all I have to say-if he runs a company look out

#9 Copenhahen Charlie on 07.16.14 at 3:20 PM

feel bad for the folks in Greensboro ugh

#10 AML on 07.17.14 at 7:33 AM

Copenhagen Charlie – I was thinking the same thing. Kessler has made a ton of money in his last 2 gigs. Both ending in buyouts. USSTB to Altria now the this deal. Although I have heard he made sure his folks at Lorillard would have jobs at least for a couple of years after the deal closes. Unfortunately the USSTB folks weren’t so lucky.

#11 OTP Kid on 07.18.14 at 12:50 PM

It won’t matter what they do with Blu – the market is already saturated. Price is a killer and ioutlets are all selling their own juice. I stand by the fact they got snookered, and RJR is clueless with Vuse.

#12 Copenhahen Charlie on 07.18.14 at 11:47 PM

Vuse is actually a very well engineered product. Not everyone wants to use e-liquids since they are messy. Tank units leak also. There will still be a market for traditional e-cigs and who knows how it will all work out.

#13 Hoosier on 07.21.14 at 1:18 AM

This development is extremely interesting as it shows again how the tobacco industry is able to adapt to the fast changing dynamics of the consumer that is finding other ways to enjoy tobacco. Even 5 years ago, one would have had to be really insightful to see folks concerned about e-cigarettes being so disruptive no matter what form they might be. Time will only tell if they are just a fad or not. There is still a need to deliver real tobacco satisfaction and when that actually happens we might see a much more dramatic change in the consumers use.

#14 Jersey Boy on 07.23.14 at 12:25 AM

My stores do extremely well with the Newport brand I just hope Reynolds doesn’t screw up a good thing like they have done in the past. I mean if they mess this up there will be this one company that will make us all bend over!

#15 Vapor Vixen on 08.12.14 at 11:18 AM

It seems to me that the business is evolving and I see the failure of a lot of the e-cigarettes losing traction because they are products of how cheap can we get. there are many e-cigarettes that one can purchase that are so much better in performance that don’t rely on the cheaper vape pens and cheap liquids. improvements are being made but retailers and quick buck manufacturers have just put a bad taste in many consumers mouths.

#16 Lou on 05.26.15 at 10:39 PM

RAI – Finally…FTC approves RAI/LO Deal
Sentiment Indicator : positive
Posted by Nik Modi on Tuesday, May 26 2015, 6:19 PM ET
The FTC today approved the acquisition of Lorillard by Reynolds American in a 3-2 vote (with Commissioners Joshua Wright (R) and Julie Brill (D) dissenting). The FTC approved the existing divestiture package without any additional remedies. As a reminder, when RAI announced the deal, it agreed to divest its cigarette brands Winston, Kool, Salem, and Lorillard’s Maverick and blu e-cigarette brand as well as Lorillard’s sales force and certain facilities for $7.1B to Imperial Tobacco. In approving the deal, the FTC noted that the divestiture package alleviated the FTC’s concerns about the deal’s anti-competitive nature.

From here, we expect investor focus to now turn to post-deal execution of synergies. As a reminder, we see nearly $5 in EPS by 2017 driven by $900M in synergies (company guided $800M) and the continuation of strong fundamentals for the cigarette business. We also see upside to our estimates, primarily driven by: 1) revenue synergies (which we do not account for at all in our numbers); 2) higher cost synergies; 3) trend normalization for the smokeless business; and 4) upside from tobacco alternatives (Vuse, Zonnic, heat not burn technology, etc.). For our detailed work on post-deal implications for RAI, please see our latest note published April 19, “The Camel’s Journey Continues.”

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