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We all know the axiom that “Where there’s smoke, there’s fire.” But have you ever noticed how, when one person lights up, someone else inevitably does too? That’s what happened today when Imperial Tobacco ( LSE:IMT) lit up the news that it was hoping to acquire some brands currently the property of Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI). The fire that Imperial lit has spread, not only to the aforementioned other tobacco companies, but also to to British American Tobacco (LSE:BATS) and the Altria Group (NYSE:MO) as the announcement revealed that the rumors of a merger between Reynolds and Lorillard are, indeed true. The share prices of each opened up sharply this morning.
| Symbol |
Close |
Open |
Mkt. Cap |
| LO |
63.09 |
66.02 |
$23.90 |
| MO |
42.95 |
43.53 |
$86.62 |
| BAT |
3,521.00 |
3,560.00 |
$66.60 |
| IMT |
2,659.00 |
2,675.00 |
$26.25 |
| RAI |
62.26 |
62.37 |
$32.65 |
What Imperial Wants to Do
Apparently Imperial has already obtained $7 billion to obtain the Kool and Salem brands, both belonging to Reynolds. This is a good move for all three companies as it, in addition to rounding Imperial’s product offering, reduces the ability for anyone to claim that a merger or acquisition by Reynolds with, or of, Lorillard would be a violation of U.S. anti-trust laws.
What’s In It for Reynolds and Lorillard?
If Reynolds were to acquire Lorillard, it would create a new entity from the number two and number three U.S. tobacco products companies that would become well-positioned to compete more vigorously, if not more successfully, against market leader Altria and give it “a commanding position in the fast-growing market for electronic cigarettes with the variety of options the two companies offer.” The combined companies would have an initial market capitalization of $56.5 billion.
Why is British American Involved?
Because BAT owns 42% of Reynolds American. What is more, BAT has indicated that it, “expects to support the transaction by subscribing for additional shares in Reynolds American, with the aim of maintaining its existing 42% equity position.”
What is Altria’s Concern?
Altria, owner of Marlboro and both Copenhagen and Skoal chewing tobacco, currently owns half of the U.S. retail cigarette market. The acquisition of Lorillard by Reynolds would create a much stronger rival to threaten Altria’s dominance.
What is the Sum of the Matter?
The American market for cigarettes has been in decline for some years. The percentage of American smokers has declined by 50% since World War II. A recent study indicated that only 20% of Americans now smoke. Standing alone, RAI and LO are on a slow road to extinction. Together, not only do they have a broader product offering, but they could expect millions of dollars in cost savings be eliminating redundancies alone.
Spokesmen for Reynolds and Lorillard indicated that they will not offer and further comments on the matter. Lorillard specifically said, “No agreement has been reached and there can be no assurances that any transactions will result. Unless circumstances dictate otherwise, Lorillard does not intend to make any additional comments regarding this matter.”
To add some smoke to the fire, British American is nearing the end of its stand-still agreement with Reynolds, and it should soon be in a position to acquire Reynolds outright should it desire to do so.
