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Cigarette maker Reynolds to buy Lorillard in $25B deal; to sell some brands

Packs of Newport, a Lorillard brand, and Camel, a Reynolds American brand, cigarettes are arranged for a photo Tuesday, July 15, 2014 in Philadelphia. Reynolds American Inc. is planning to buy rival Lorillard Inc. for about $25 billion in a deal to combine two of the nation's oldest and biggest tobacco companies, the companies announced Tuesday. (AP Photo/Matt Rourke)

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Packs of Newport, a Lorillard brand, and Camel, a Reynolds American brand, cigarettes are arranged for a photo Tuesday, July 15, 2014 in Philadelphia. Reynolds American Inc. is planning to buy rival Lorillard Inc. for about $25 billion in a deal to combine two of the nation's oldest and biggest tobacco companies, the companies announced Tuesday. (AP Photo/Matt Rourke)

RICHMOND, Va. - Joe Camel is bulking up to take on the Marlboro Man.

Camel cigarette maker Reynolds American Inc.'s $25 billion deal to buy Newport maker Lorillard Inc. creates a formidable No. 2 tobacco company in the U.S. behind Marlboro maker Altria. It also creates a powerhouse in menthol cigarettes, which are becoming a bigger part of the business and gives the combined company some breathing room even as people smoke fewer cigarettes every year.

The deal announced Tuesday also create a new major player in the country's tobacco market, the U.K.'s Imperial Tobacco, which is buying some of the companies' other brands including Kool and Winston and instantly becomes the king of e-cigarettes in the U.S.

The deal also is a big indication that Reynolds sees electronic cigarettes as a promising side business but not the whole future. To get the acquisition done, Reynolds is ceding a commanding lead in the e-cigarette business by selling off Lorillard's dominant Blu e-cig brand, highly visible because of its TV commercials featuring Stephen Dorff and Jenny McCarthy, to Imperial.

Reynolds and Lorillard value the deal at about $27 billion including debt. It is expected to close in the first half of 2015 but will likely face regulatory scrutiny. Lorillard shareholders would receive $50.50 in cash for each share and 0.2909 of a share in Reynolds stock at closing, a combination valued by the companies at $68.88 per share.

After the deal, company, which will remain based in Winston-Salem, North Carolina, is projected to have more than $11 billion in revenue.

To help to ease regulatory concerns about competition, Imperial Tobacco Group will buy the Kool, Salem, Winston, Maverick and Blu e-cig brands for $7.1 billion, tripling its share of the U.S. cigarette market. Imperial already owns Fort Lauderdale, Florida-based Commonwealth-Altadis Inc., maker of USA Gold cigarettes.

Reynolds will keep its Camel, Pall Mall and Natural American Spirit brands and acquire Lorillard's flagship Newport brand, giving it 34 per cent share of the U.S. retail cigarette market.

Newport and Camel are two of the largest players in menthol cigarettes. On its own, Newport accounts for 37 per cent of the menthol segment. While people are smoking less, buying 19 per cent fewer cigarettes overall in 2013 than five years earlier, menthol cigarette sales have fallen by only 7 per cent and its share of the market grew 4 percentage points to about 31 per cent, according to market researcher Euromonitor International.

"Cigarette volume in this country has been declining for a very, very long time, but ... it's important as we see consolidation and growth in market share, to have a true portfolio of iconic brands," Reynolds CEO Susan Cameron said in an interview with The Associated Press, who also noted the potential to expand Newport in the western U.S. and Camel in the East, regions where each are weaker.

Despite selling Blu, Reynolds will remain in e-cigarettes and will focus on expanding its rechargeable Vuse e-cigarette brand, which expanded nationally last month after quickly becoming the top-selling brand in its initial test-market states of Colorado and Utah.

Cameron said the company is confident in Vuse's "game-changing" technology that monitors and adjusts heat and power to deliver more consistent puffs.

But the menthol and e-cigarette markets aren't a sure bet. Both face the possibility of heavier regulation.

The Food and Drug Administration is weighing restrictions on the minty smokes after a review concluded while there's little evidence to suggest that they are more or less toxic or contribute to more disease risk than regular cigarettes, they likely pose a greater public health risk than regular cigarettes because younger people are more likely to start using them and that menthol smokers have a harder time quitting.

The agency also has proposed regulating battery-powered e-cigarettes, banning sales to anyone under 18, adding warning labels and requiring agency approval for new products. The devices produce vapour, usually nicotine-laced, instead of smoke.

Raising prices and cutting business costs has kept the industry profitable. The deal will help with the cost-cutting end: Reynolds expects to save about $800 million a year in costs.

The net effect on jobs and the economy in the American South's tobacco country is uncertain. Reynolds, which has about 5,200 full-time employees and produces its cigarettes at its 2 million-square-foot Tobaccoville, North Carolina, plant, said it plans to hire, primarily in manufacturing, over 18 months following the closing.

Imperial is buying Lorillard's manufacturing and offices in Greensboro, North Carolina, along with about 2,900 employees. Imperial did not say whether it would use Lorillard's headquarters.

The combined company will challenge Altria Group Inc., owner of Philip Morris USA, which holds about half of the retail cigarette market. The company declined to comment on Tuesday's news.

The companies said British American Tobacco PLC, which makes Kent and Dunhill cigarettes overseas, will maintain its 42 per cent stake in Reynolds, and Lorillard shareholders will hold a 15 per cent stake.

Reynolds and British American Tobacco also agreed to share technology related to the development and commercialization of next-generation tobacco products, including cigarettes that heat tobacco rather than burning it, and other nicotine-delivery products.

Lorillard's stock fell $5.47, or about 8 per cent, to $61.75 in afternoon trading Tuesday. Reynolds' stock fell $3.27, or about 5 per cent, to $59.91.

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Michael Felberbaum can be reached at http://www.twitter.com/MLFelberbaum.

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