Shares of both
Reynolds American Inc
) jumped after Financial Times reported that Reynolds American is
considering taking over its rival Lorillard.
Per the report, Reynolds - the maker of Camel brand cigarettes
has hired Lazard, an investment bank, to look for a possible deal
with the third largest U.S. cigarette company, Lorillard. The
report also stated that the purchase price could be more than $20
billion. However, it is unclear whether Reynolds plans to bid for
the whole company or only a portion of it. Any deal would also
involve U.K.-based British American Tobacco (BATS), which owns
roughly 40% stake in Reynolds and whose brands include Pall Mall
and Kent. Shares of Reynolds and Lorillard surged 4.84 and 9.25%,
respectively on the speculation.
Both Reynolds and Lorillard are the biggest tobacco sellers in
the U.S. after peer
Altria Group Inc.
), which makes Marlboro cigarettes. So, a combination of these
two companies and their leading brands might pose a threat to
Altria. Lorillard's Newport brand holds the number one position
in the menthol cigarettes market in the U.S. and also has a solid
footprint in the profitable electronic cigarettes market with its
blu e-Cigs brand (acquired in Apr 2012) and UK-based SKYCIG
(acquired in Oct 2013).
The combination of two leading U.S. cigarette makers would
also change the industry dynamics - possibly creating one of the
strongest global tobacco companies. Companies like Altria Group,
Reynolds American, Lorillard and
Philip Morris International Inc
) have been facing declining cigarette volumes and regulatory
restrictions for years. The slowdown in the tobacco industry,
increasing health consciousness among consumers and significantly
higher prices of cigarettes has impacted volumes. Increases in
federal, state and local excise taxes and manufacturer price have
increased cigarette prices, which have significantly impacted the
consumption of cigarettes. In addition, a rise in the number of
people who quit smoking has also impacted sales.
The global cigarette-making industry continues to be in a flux
as it deals with increased regulation on packaging (graphic
warning labels) in some international markets, heightened FDA
concerns about public health issues of menthol cigarettes, and
the advent of the electronic cigarette. The adoption of graphic
warning labels on cigarette packaging in the U.S. will always be
a risk, while the adverse effect of exposure to menthol variants
and selling of e-cigarettes have also come under FDA review. The
tobacco industry in Europe also received a blow after the
Presidency of the Council of the European Union (EU) and the
Members of European parliament reached a settlement recently on
draft legislation, which could curb the growth of e-cigarettes
Currently, Lorillard has a Zacks Rank #3 (Hold), while
Reynolds holds a Zacks Rank #4 (Sell).
LORILLARD CO (LO): Free Stock Analysis Report
ALTRIA GROUP (MO): Free Stock Analysis Report
PHILIP MORRIS (PM): Free Stock Analysis
REYNOLDS AMER (RAI): Free Stock Analysis
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