Reynolds American Enters into Acquisition of Lorillard Tobacco

“Transforming tobacco” is the first thing you’ll see when you visit the website of Reynolds American, Inc. (NYSE: RAI). As of July 15, RAI has done just that, with the announcement of acquiring Lorillard, Inc. (NYSE: LO) for the grand sum of $27.4 billion. The press release, of early morning Tuesday, stated they “have entered into a definitive agreement in which RAI has agreed to acquire Lorillard in a cash-and-stock transaction currently valued at $68.88 per Lorillard share, or a total of $27.4 billion, including the assumption of net debt.”

The agreement marks the merging of two of the biggest tobacco companies in America, combining Camel, Pall Mall, Natural American Spirit, and Newport. Such a deal leaves the 4-century old tobacco industry of the U.S. with two competitors now controlling 90% of the market. In lieu of these anti-trust concerns, RAI has also announced the divestiture, and subsequent sale, of KOOL, Salem, Winston, Maverick, and bluCigs, to Imperial Tobacco Group (LSE: IMT), the fourth-largest international tobacco company, for $7.1 billion. Additionally, British American Tobacco (LSE: BATS), RAI’s largest shareholder, will in part finance the transaction by contributing $4.7 billion in order to maintain the company’s 42 percent share of Reynolds American.

RAI and BAT, together, continue to “pursue an ongoing technology-sharing initiative for the development and commercialization of next generation tobacco products, including heat-not-burn cigarettes and vapor products.”

Speaking of their pursuit in the smokeless tobacco and vaporizing industry, RAI’s president and CEO, Susan Cameron, had this to say:

“Reynolds American and Lorillard have complementary core strengths and the addition of Newport to our operating companies’ existing key brand portfolios – including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly – will enhance our ability to compete in the combustible cigarette and smokeless categories. We are also confident in R.J. Reynolds Vapor Company’s digital vapor cigarette VUSE, which offers superior technology and has received very positive early results in its national rollout. This transaction will provide RAI with additional resources to invest in innovation, R&D and its operating companies’ brands. This will benefit adult tobacco consumers and wholesale and retail customers alike.”

Cameron also commented on RAI’s belief that R.J. Reynolds Vapor Company’s VUSE brand will be a “game-changing vapor product.” Cameron stated, “We made the determination several years ago to internally design and develop VUSE as the first digital vapor cigarette, and intend to remain focused on its growth and expansion nationwide. Imperial is getting a great brand in bluCigs, and will remain a key competitor in that growing category of the industry.”

With the addition of top-selling cigarettes, smokeless investments, and international finance, it seems Reynolds American, Inc. does have its eyes set on “transforming tobacco”. The company should now enjoy greater presence through geography alone, with R.J. Reynoldsbrand strength in the Western U.S. complimenting Lorillard’s strength in the East. As Lorillard was founded in 1760, it is an acquisition for the ages that leaves RAI with a significantly stronger and diverse cigarette portfolio, while creating new tools for further expansion. It is a point best reinforced by Cameron stating, “Our agreement to jointly pursue development of new tobacco products, such as heat-not-burn cigarettes and vapor products holds great promise for global growth in those categories. This will certainly enhance value for shareholders.”