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Share prices of tobacco giants Reynolds American Inc. (RAI - Analyst Report) and Lorillard Inc. (LO - Analyst Report) plummeted on July 15 by almost 7% and 11% respectively after Reynolds officially announced that it has entered into an agreement to take over rival Lorillard for $68.88 per share or a total consideration of $27.4 billion, including assumption of net debt. Investors are not happy with the deal as they feel Reynolds is paying too much for the company.

However, Reynolds will have to divest some of its assets Imperial Tobacco Inc.  to fulfill anti-trust requirements. Per the agreement with Imperial Tobacco, Reynolds will have to sell KOOL, Salem, Winston, Maverick and blu eCigs brands and other assets and liabilities for $7.1 billion in cash.

U.K.-based tobacco maker British American Tobacco (BAT), which owns roughly 42% stake in Reynolds, is also playing an important role in the takeover. BAT has assured full support to the deal and post merger will maintain its stake through an investment of $4.7 million based on Reynolds’ closing price as of Jul 2. Investment bank Lazard Ltd. (LAZ - Analyst Report) will act as a financial advisor in the takeover process.

That terms of the takeover represents a 40.4% premium to the Lorillard’s stock price on Feb 28, the day before media speculation regarding the merger arose. The deal also represents a premium of 12.6% to the stock price on July 2 when the two companies started advanced talks regarding the merger.   

The Lorillard takeover, however, failed to impress the investors. Reynolds shareholders feel that the terms of the deal churned out more than required. .,They also feel that Lorillard, which derives a principal portion of its revenues from the menthol category, is not a good fit for Reynolds as governments around the world are imposing restrictions on menthol cigarettes.

Moreover, the U.S. Food and Drug Administration (FDA) is reviewing the pros and cons of these cigarettes and might impose restriction on the product very soon. Investors were also discouraged by Reynolds’ decision to divest blu eCigs which was yielding solid results lately.

However, Reynolds believes that the addition of the Newport brand, which commanded 12.6% share in 2013, will be beneficial and facilitate future growth. The company is optimistic about the ongoing FDA review of menthol cigarettes of the U.S. cigarette market and hopes for a favorable decision.

The acquisition will bring major brands like Newport, Camel, Pall Mall and Natural American Spirit in combustible cigarettes; Grizzly in smokeless tobacco; and VUSE in the growing e-cigarette market under one banner.

Moreover, Reynolds has entered into an agreement with BAT to jointly develop new tobacco products, such as heat-not-burn cigarettes and vapor products, under its Next Generation Product category.

The combined entity might pose a threat to peer Altria Group Inc. (MO - Analyst Report), which manufactures Marlboro cigarettes and commands more than 40% market share in the U.S.

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