“This transaction in our view will be very positive for the global tobacco industry,” says Wells Fargo analyst.
U.S. tobacco company Reynolds American Inc. (RAI) has been in talks to buy Lorillard Inc. (LO) both companies confirmed Friday, according to the Wall Street Journal.
The multibillion-dollar deal would create a powerful new No. 2 to industry leader Altria Group Inc.
Lorillard has a market value of about $23 billion, compared with Reynold’s $33 billion. The potential takeover would combine leading Reynolds cigarette brands such as Camel and Pall Mall with Lorillard’s Newport, the top-selling menthol cigarette, the Wall Street Journal reported.
Imperial Tobacco Group of the U.K. said earlier Friday that it is in talks to buy assets from Reynolds and Lorillard. To satisfy antitrust authorities and help finance its takeover of Lorillard, Reynolds could sell several of its smaller brands, including Winston, Kool and Salem.
“We reiterate our outperform ratings on both RAI and LO and our 90%+ probability that this deal is going to happen, creating value for both RAI and LO shareholders,” said Bonnie Herzog, managing director, Beverage, Tobacco & Convenience Store Research for Wells Fargo Securities LLC.
“We continue to anticipate Imperial/Commonwealth will acquire several of the smaller/non-priority brands in an attempt to pre-empt any potential FTC anti-trust issues. Finally, we anticipate that British American Tobacco (BAT) could inject some capital by retaining its current 42% ownership of RAI in the combined entity as well as announce a strategic partnership with the combined RAI/LO entity to market and distribute both Vuse and blu e-cigs internationally. Bottom line, this transaction in our view will be very positive for the global tobacco industry and could be just the beginning of future transactions with e-cigs/vapor being the underlying catalyst. We reiterate our overweight sector rating and expect both RAI and LO to trade up sharply tomorrow.”