Reynolds and Lorillard merger to reshape Big Tobacco

Reynolds American and Lorillard are in the final stages of agreeing a complex merger that will reshape Big Tobacco by bringing together two of the three largest US operators with a combined market capitalisation of $56 billion.

The deal will have a knock-on effect on the two big UK rivals, British American Tobacco – which has a 42 per cent stake in Reynolds – and Imperial Tobacco, which has confirmed it will buy assets from the merged group.

Reynolds, Lorillard and BAT have agreed key elements of the deal, including price, and are finalising details such as which cigarette brands and production facilities to dispose of in order to assuage competition concerns.

Negotiations between the three companies, which have been under way since early this year, have intensified in recent days and the parties hope to announce a deal as soon as next week, the companies confirmed.

It was first reported in March that Reynolds and Lorillard, the second- and third-largest tobacco producers in the US, respectively, were working on the proposed merger. But concerns about the response from competition regulators and the complexity of BAT owning a significant portion of Reynolds had stymied efforts to agree a deal.

Reynolds’ brands include Camel, Kool and Pall Mall. Lorillard’s brands include Maverick, Old Gold and Kent – though more than 80 per cent of Lorillard’s sales come from the Newport brand of menthol cigarettes, which have bucked a long-term decline in US smoking rates.

The US is one of the world’s biggest tobacco markets, with annual sales of $90 billion, though it has been shrinking at a rate of 3 per cent a year.

Reynolds and Lorillard lie behind Altria, which accounts for about half of the US cigarette market through its Philip Morris USA division. – Copyright The Financial Times Limited 2014