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Reynolds American to buy Lorillard for US$27.4b

US tobacco giant Reynolds American will buy smaller rival Lorillard in a $27.4 billion cash-and-stock deal.

NEW YORK: US tobacco giant Reynolds American will buy Lorillard for $27.4 billion and sell cigarette brands including Salem and Winston to British firm Imperial Tobacco for $7.1 billion, the companies said on Tuesday.

The deal combines Reynolds American Inc. (RAI), the parent company of RJ Reynolds, maker of Camel and Pall Mall cigarettes, and Lorillard, whose Newport cigarette is the best-selling menthol brand and the second-best selling cigarette in the US.

The combination of Reynolds American, the second-largest US tobacco company and number-three Lorillard challenges market leader Altria, maker of Marlboro cigarettes. RAI also announced that British firm Imperial Tobacco will purchase its cigarette brands, including menthol cigarettes Kool and Salem, and Winston, and other assets for $7.1 billion in cash.

"The addition of these brands to Imperial's US operations will more than triple its share of the US cigarette market, position it for long-term success in traditional tobacco products and the growing e-cigarette category, and elevate it to the status of a major US competitor for the first time," RAI said.

British American Tobacco, RAI's largest shareholder, backed the deal and will maintain its 42 per cent stake through an investment of about $4.7 billion. The RAI-Lorillard combined company will have more than $11 billion in revenues and about $5 billion in operating income, the firms said in a joint statement.

Under the terms of the cash-and-stock agreement, Lorillard shareholders will receive, for each Lorillard share, $50.50 in cash and 0.2909 of a share in RAI stock at the closing of the transaction. That represents a premium of 40.4 per cent to RAI's stock price on February 28, before initial media speculation on a possible tie-up.The $27.4 billion deal includes assumption of net debt.

"Reynolds American and Lorillard have complementary core strengths and the addition of Newport to our operating companies' existing key brand portfolios -- including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly -- will enhance our ability to compete in the combustible cigarette and smokeless categories," said Susan Cameron, RAI's president and chief executive, in the statement.

RAI said it expects to book post-tax net cash proceeds of about $4.4 billion from the sale of assets to Imperial Tobacco. As part of that asset sale, Imperial will acquire certain Lorillard assets, including its manufacturing and research and development facilities in Greensboro, North Carolina, and some 2,900 employees, including a national sales force.

The sale of those assets to Imperial is conditioned in part on RAI's completion of the acquisition of Lorillard.  RAI said it expects to complete the acquisition of Lorillard in the first half of 2015, subject to shareholder and regulatory approvals.

The Imperial transaction was expected to close "substantially at the same time." In pre-market trade, Reynolds American shares were down 2.9 per cent at $61.35 and Lorillard slumped 5.6 per cent to $63.60.

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