Sunday - Sep 24, 2017

US tobacco giant Reynolds American to pay out $27 billion to acquire Lorillard

US tobacco giant Reynolds American to pay out $27 billion to acquire Lorillard

Before yesterday,Reynolds American was well regarded as the second-largest tobacco company in the United States. However, if their plans to acquire their closest rival Lorillard come to fruition, the company will significantly close the gap on the current market leader Altria, better known to many as Philip Morris.

According to unofficial reports, Reynolds American has been pursuing Lorillard for some time, and negotiations are at such an advanced stage that a final agreement is expected to be signed by the end of this month. Reynolds American who will be paying out $27.4 billion for the third largest American cigarette manufacturer, will undoubtedly become the key player in the US tobacco market which currently generates around $90 billion annually.

According to details released on the acquisition, Reynolds American has valued Lorillard shares at $68.88 a share, and in order to close the deal as well as to allay the possibility of regulatory concerns, the new combined tobacco giant has agreed to sell their Kool, Salem, Winston, and Maverick cigarette brands, as well as the Blu e-cigarette brand, to UK’s Imperial Tobacco for $7.1 billion.

The acquisition will see the UK-based cigarette manufacturer instantly triple its US market share. Under the terms of the brand sell-off deal, Imperial will also become the owners and occupiers of Lorillard’s headquarters in North Carolina, taking over its extensive manufacturing and research and development facilities, as well as assuming responsibility for the company’s 2,900 employees.

Financing a deal of such scale and complexity requires some innovative financing, a factor which has seen the management team of Reynolds American request and receive a cash injection of $4.7billion from British American Tobacco (BAT), who hold a 42 per cent in Reynolds American. The capital injection will see BAT maintain the size of their shareholding in the combined.

Once the acquisition deal has been completed the new and improved Reynolds American is projected to generate in excess of $11 million in revenues holding around 40 per cent of the US market, compared with Altria’s share of approximately 50 percent, while the Imperial’s share of the US market will take up most of the remaining 10 per cent.

As news of the potential acquisition began to break, the stock market seemed less enthusiastic with shares in Lorillard dropping by 10% to $60.17 whilst Reynolds American shares also dropped, although by just 7%, closing on $58.84.

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