Reynolds Drops On Jury Award As Merger Questioned

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Tobacco giantReynolds American ( RAI ) stumbled Monday on news that a Florida jury awarded the widow of a long-time smoker who died of lung cancer a $23.6 billion verdict.

The verdict, handed down last Friday, hit most tobacco stocks. The Tobacco industry group is ranked No. 35 out of 197. That's up from No. 49 just six weeks ago.

Most observers don't expect the award to hold up, anticipating it will be dramatically reduced by the trial judge or an appellate court. Legal experts said the award is well outside the bounds for punitive damage.


The stock recovered much of its early-morning loss. But Reynolds shareholders have other worries: The market has not reacted well to last week's news of a planned merger withLorillard ( LO ).

After months of speculation over possible mergers among Big Tobacco, Reynolds and Lorillard announced July 15 a $27.4 billion merger agreement that included Reynolds assuming Lorillard's debt.

Stocks in both companies plunged 7% that day, reversing prior uptrends and sending the stocks down through their 50-day moving averages in heavy volume. The action since then has been less than encouraging, with Reynolds bearing most of the brunt. While Lorillard has stabilized the last four days, Reynolds has sunk further.

Most of the negative chatter centers on whether the merged companies can get antitrust clearance. Reynolds is the No. 2 tobacco company in the U.S. and Lorillard is No. 3, measured by sales.

Tobacco consumption has been on the decline for years and suffered a 4% decline last year.

They are trying to make up for lost sales through the development of e-cigarettes that use battery power to release smoke-like vapor. They are supposed to avoid the negative health effects, but they, too, are being scrutinized by regulators.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: RAI , LO

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