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Reynolds-Lorillard Clear Final Hurdle, Merge June 12

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The long-awaited $27.4 billion merger between tobacco majors Reynolds American Inc. and Lorillard Inc. is expected to close on Jun 12 as a federal judge has approved Reynolds’ request to sell some of its cigarette brands to Imperial Tobacco Group Plc.

The merger between the second and third largest U.S. cigarette makers was first announced in Jul 2014. Post merger, Reynolds’ largest shareholder British American Tobacco (BTI) will continue to own 42% of the company. The merger received approval from the Federal Trade Commission on May 26, 2015 after a prolonged review regarding anti-competitive issues

In an attempt to ease antitrust issues, Reynolds and Lorillard planned to divest several of their key brands like blu eCigs, Winston, Kool, Maverick and Salem to the U.K.-based tobacco maker, Imperial Tobacco. After the divestment, Imperial Tobacco will own almost 24% share of the U.S. tobacco market.

However, the divestment was delayed as it was subject to clearance from the federal district court. Both R.J Reynolds, an indirect subsidiary of Reynolds, and Lorillard are subject to a civil judgment passed in 1999 in a government racketeering case. Per the ruling, both the companies have to obtain clearance from the court before divesting any cigarette brand.

Post acquisition, Reynolds’ annual revenue is expected to be $11 billion and operating income is likely to amount to $5 billion.

The acquisition is expected to consolidate the tobacco industry and increase growth opportunities for Reynolds. The merger will also bring Lorillard’s Newport and Reynolds’ Camel brands under the same banner. Reynolds, currently carrying a Zacks Rank #1 (Strong Buy) also expects the transaction to provide resources to invest in innovation and research and development for its brands.

Moreover, Lorillard, carrying a Zacks Rank #2 (Buy), enjoys a solid presence in the profitable e-cigarette market backed by its blu eCigs and SKYCIG brands. These will help Reynolds to gain share in this category. The merger is also expected to intensify competition for other tobacco majors like Altria Group Inc. (MO - Free Report) and Philip Morris International Inc. (PM - Free Report) .

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