By Dana Mattioli and Mike Esterl
Reynolds American Inc. and Lorillard Inc. are in advanced talks
to combine in a deal that would dramatically reshape the U.S.
tobacco landscape, creating a powerful No. 2 to industry leader
Altria Group Inc., according to a person familiar with the
matter.
The potential takeover would combine leading Reynolds cigarette
brands such as Camel and Pall Mall with Lorillard's Newport, the
top-selling menthol cigarette, at a time when the $100 billion U.S.
tobacco industry is wrestling with flagging cigarette sales.
It would also give Winston Salem, N.C.-based Reynolds a
commanding position in the fast-developing market for electronic
cigarettes, the battery-powered heating devices that turn
nicotine-laced liquid into vapor, and represent a growing
alternative to traditional smokes.
Lorillard's blu e-cigarette has nearly a 50% market share in
U.S. gasoline and convenience stores. Reynolds has been slower to
dive into e-cigarettes, which could top $2 billion in U.S. sales
this year. Reynolds plans to begin a national rollout of its Vuse
e-cigarette next month, after launching the product in Colorado and
Utah in recent months.
A tie-up would also create international ripples. U.K.-based
British American Tobacco PLC, maker of Kent and Dunhill cigarettes,
owns a 42% stake in Reynolds and would likely have a major say in
any deal. A 10-year standstill agreement between British American
and Reynolds expires in July, when it can make an unsolicited offer
for the Reynolds shares it doesn't currently own.
Talk of potential deals involving the three companies has
coursed through financial markets and periodically surfaced in
media reports for months.
Reuters reported earlier Wednesday that Reynolds was in active
discussions to buy Lorillard in a three-way transaction in which
British American could take a major role.
Reynolds, Lorillard and BAT declined to comment on any potential
talks.
Reynolds's share price rose 4.4% to $59.77 Wednesday, bringing
its stock market capitalization to $32 billion. Lorillard's shares
closed 10% higher at $62.63, pushing its stock market
capitalization above $22 billion.
Any deal would likely carry a heavy dose of risk.
The U.S. Food and Drug Administration is considering curbs on
menthol cigarettes after it banned all other cigarette flavors in
2009. That poses a significant regulatory threat for
Lorillard--which derives more than 80% of its revenue from
menthol--or anybody that acquires it. A final ruling from the FDA
could be months or years away.
It also would likely face antitrust scrutiny, placing about 90%
of the U.S. tobacco industry in the hands of two companies.
Reynolds has a roughly 25% share and Greensboro, N.C- based
Lorillard has a roughly 15% market share. Altria, maker of Marlboro
cigarettes, controls about 50% of the market.
Senior Lorillard executives were called into an urgent meeting
Wednesday on short notice, according to a person outside the
company.
Speculation of a potential deal was heightened when Reynolds
announced unexpectedly last month that Daniel Delen would retire as
chief executive at the end of April. Mr. Delen was replaced by
Susan Cameron, who had retired as CEO in 2011 but rejoined
Reynolds's board last December.
Ms. Cameron ran Reynolds for seven years, overseeing the
company's integration of rival Brown & Williamson after the two
U.S. companies combined in a $3 billion deal in 2004. Brown &
Williamson had been BAT's U.S. subsidiary.
Reynolds and Lorillard last year had net sales of $8.24 billion
and $4.97 billion, respectively, excluding excise taxes.
Write to Dana Mattioli at dana.mattioli@wsj.com and Mike Esterl
at mike.esterl@wsj.com
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