Share prices of tobacco giants
Reynolds American Inc.
) plummeted on July 15 by almost 7% and 11% respectively after
Reynolds officially announced that it has entered into an agreement
to take over rival Lorillard for $68.88 per share or a total
consideration of $27.4 billion, including assumption of net debt.
Investors are not happy with the deal as they feel Reynolds is
paying too much for the company.
However, Reynolds will have to divest some of its assets
Imperial Tobacco Inc. to fulfill anti-trust requirements. Per
the agreement with Imperial Tobacco, Reynolds will have to sell
KOOL, Salem, Winston, Maverick and blu eCigs brands and other
assets and liabilities for $7.1 billion in cash.
U.K.-based tobacco maker British American Tobacco (BAT), which
owns roughly 42% stake in Reynolds, is also playing an important
role in the takeover. BAT has assured full support to the deal and
post merger will maintain its stake through an investment of $4.7
million based on Reynolds' closing price as of Jul 2. Investment
) will act as a financial advisor in the takeover process.
That terms of the takeover represents a 40.4% premium to the
Lorillard's stock price on Feb 28, the day before media speculation
regarding the merger arose. The deal also represents a premium of
12.6% to the stock price on July 2 when the two companies started
advanced talks regarding the merger.
The Lorillard takeover, however, failed to impress the
investors. Reynolds shareholders feel that the terms of the deal
churned out more than required. .,They also feel that Lorillard,
which derives a principal portion of its revenues from the menthol
category, is not a good fit for Reynolds as governments around the
world are imposing restrictions on menthol cigarettes.
Moreover, the U.S. Food and Drug Administration (FDA) is
reviewing the pros and cons of these cigarettes and might impose
restriction on the product very soon. Investors were also
discouraged by Reynolds' decision to divest blu eCigs which was
yielding solid results lately.
However, Reynolds believes that the addition of the Newport
brand, which commanded 12.6% share in 2013, will be beneficial and
facilitate future growth. The company is optimistic about the
ongoing FDA review of menthol cigarettes of the U.S. cigarette
market and hopes for a favorable decision.
The acquisition will bring major brands like Newport, Camel,
Pall Mall and Natural American Spirit in combustible cigarettes;
Grizzly in smokeless tobacco; and VUSE in the growing e-cigarette
market under one banner.
Moreover, Reynolds has entered into an agreement with BAT to
jointly develop new tobacco products, such as heat-not-burn
cigarettes and vapor products, under its Next Generation Product
The combined entity might pose a threat to peer
Altria Group Inc.
), which manufactures Marlboro cigarettes and commands more than
40% market share in the U.S.
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