Cigarette deal could reshape Big Tobacco

Reynolds American and Lorillard confirm they are in merger talks. Here's what analysts have to say about it.

By Staff Jul 11, 2014 1:49PM

Credit: © Matt Rourke/AP Photo

Caption: Camel cigarettes, a Reynolds American brandBy Chris Ciaccia, TheStreet

Reynolds American (RAI) confirmed Friday it was in talks to acquire smaller rival Lorillard (LO) following news that London-based Imperial Tobacco said it would buy certain assets and brands owned by both companies, essentially forcing the hand of the companies to admit to merger logo

In a statement, Lorillard said, "No agreement has been reached and there can be no assurances that any transactions will result. Unless circumstances dictate otherwise, Lorillard does not intend to make any additional comments regarding this matter."

The news comes after Reuters first confirmed the talks in May, citing sources close to the negotiations.

Any deal would have to be approved by London-based British American Tobacco (BTI), since it owns 42 percent of Reynolds American.

As part of the deal, Imperial Tobacco would potentially buy up to $7 billion worth of brands from the combined companies, who are best known for brands such as Newport (Lorillard) and Camel (Reynolds), putting pressure on Philip Morris USA, a division of Altria (MO)as the largest tobacco maker in the United States.

Newport is the largest menthol cigarette brand in the U.S., while Lorillard's blu eCigs brand, is "the clear U.S. electronic cigarette category leader, achieving a 45 percent dollar market share," according to the company's first-quarter results.

Lorillard also noted that its total retail market share of cigarettes exceeded 15 percent for the first time ever, coming in at 15.2 percent for the first quarter.

Shares of Lorillard were up nearly 4% in midday trading Friday, while Reynolds American shares were fell nearly 2 percent to $61.07. 

Altria is set to issue second-quarter results on July 22. Analysts surveyed by Thomson Reuters expect the company to earn 66 cents a share on $4.59 billion in revenue. Altria, which owns the Marlboro brand, had 43.7 percent of the domestic U.S. cigarette market, and 50.6 percent of the overall market when including other brands in 2013, according to the company's website.

Tobacco stocks have performed well this year, with Altria gaining 11.9 percent year to date while Reynolds American and Lorillard have performed even better, largely due to the merger talks. Reynolds American shares have gained 24.5 percent year to date, as have shares of Lorillard.

On the back of these confirmed merger talks, here's what a few Wall Street analysts said recently about the tobacco industry, as consolidation becomes a large part of the discussion and investment thesis:

Nomura analysts

"While we still see upside for Reynolds ("buy," $66 target price) on a standalone basis should a Reynolds merger not materialise, the risk for Lorillard ("reduce," $54 target price) is that if this does not happen, there is potential for significant downside. We have already suggested in another note that discussions could in fact be aimed/limited to a contract manufacturing agreement (Not all relationships need to be consummated, dated 18 June)."

Wells Fargo analyst Bonnie Herzog

"This transaction in our view will be very positive for the global tobacco industry and could be just the beginning of future transactions with e-cigs/vapor being the underlying catalyst. We reiterate our "overweight" sector rating and expect both RAI and LO to trade up sharply tomorrow."

Cowen analyst Vivian Azer

"We think LO's valuation is stretched, as we do not believe an acquisition will occur. At the right price, we think a deal could have made sense, but we expect that regulators will require a sale of Camel . . . A sale of Camel limits some the accretion benefits, and thus should make RAI more valuation-sensitive, given the notable multiple expansion we have seen for LO."

More from TheStreet

Jul 13, 2014 1:49AM
I can't figure out why anyone starts smoking in the last 20 years with all the knowledge of how bad it is.  Seeing a 20 year old with a cigarette, tattoos or piercings makes me think they have no common sense at all.  
Jul 11, 2014 11:01PM
I was only able to quit smoking cigarettes when I finally realized that caffeine went hand in hand with my nicotine addiction. So, I quit caffeine first and nicotine a month later. It's not easy, but it is doable, I am living proof. Just trying to help someone quit if I can.
Jul 11, 2014 4:27PM
the chicken and the egg are lying in bed.the chicken is smiling and smoking a cigarette,but the egg is upset.she mutters to herself,'well,i guess we answered that question'.
Jul 11, 2014 9:29PM

If the cigarette companies truly want to have growth, why not invest in marijuana ? The prohibition since the 30's is coming to a end. Just like when prohibition of alcohol was repealed, so will marijuana. Some say it's bad for you -well so is alcohol in large quanities.

Remember: It's not the use of alcohol that's bad, it's the ABUSE of alcohol that's bad.

========>  Its' not the use of marijuana that's bad, it's the ABUSE marijuana that's bad.

Jul 11, 2014 3:33PM

It can also make you good money as an investment...Plus pays very good dividends.

long, MO, PM, RAI.

Jul 11, 2014 6:15PM
51 addicts here say no to ban of!
Jul 11, 2014 5:23PM
here we go with all you anti smoking bastards!!! go eat your water crest sandwitch and get run over by a car while you are in the road instead of the bike path !!!
Jul 11, 2014 5:35PM
Am I wrong but isn't Phillip Morris a separate company from Altria?  Did they not split up years ago?
Jul 14, 2014 10:03AM
Funny all the "informed" people on here bashing the industry that pays most of their taxes......
Jul 14, 2014 12:10PM
By all means smoke dope, guzzle booze, pop your pharmaceuticals, but don't touch those mean ole nasty tobacco products. A buzz is a buzz is a buzz!
Jul 14, 2014 1:55PM

Smokers do and have paid for their own healthcare...

Tobacco Companies, have also, but maybe if you are a non-smoker you may not realize that??

Jul 14, 2014 12:41PM
Grow your own tobacco.
That way you can be sure that you're smoking only tobacco and not government poison.
And pay for your own healthcare so us nonsmokers don't have to pay for your mistakes.

Jul 14, 2014 8:57AM

Cigarette sales and mergers ...Obama's fault too??//ehehhehehehahhehehahhhehahhaahahahahahhaahhehehehehhehhahahahaahah

I heard he screwed your mother and you are his fault too.........

Jul 14, 2014 12:07PM

A couple people have been run over by SUVS, while someone was texting, This last weekend around here...

Both were killed, a pedestrian and a bicyclist...

Should they OUTLAW....SUVS or Texting..?? Or put some heavy taxes on both..?

Cigarettes are not the only items that kill in our society...

Nobody died of smoking over the weekend, that was reported...

Well, I guess one 97 year old man, they said he smoked and drank.

Jul 11, 2014 5:50PM
Best for everyone is to get all the Tobacco companies under one group and then crush that group like a dirty Cigarette.
Jul 11, 2014 2:52PM
I say go for it and then they can help pay 25% of the nations health care bill. They can help pay for their own toxic mess. If you think you have the right to smoke then you should have the right to pay your own health care bills. Insurance, and Medicaid/Medicare should not be forced to pay. If you want to smoke then grow your own or make a deal with the tobacco companies to cover your health care. 
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