Exclusive: Reynolds American, Lorillard in advanced merger talks

Wed May 21, 2014 5:41pm EDT
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By Olivia Oran and Soyoung Kim

NEW YORK (Reuters) - Reynolds American Inc (RAI.N: Quote) is in active discussions to buy Lorillard Inc LO.N in a complicated, three-way transaction that could see British American Tobacco PLC (BATS.L: Quote) take a major role to back a potential merger, according to people familiar with the matter.

The proposed deal, which is in late stage talks, would unite the second- and third-largest U.S. tobacco companies that have a combined market value of nearly $55 billion, putting brands such as Reynolds' Camel and Lorillard's Newport under one roof.

The companies are working to finalize an agreement in as soon as a matter of weeks but the talks will likely take longer given the complex structure, the people said, asking not to be named because the matter is not public.

Reynolds, in which British American Tobacco (BAT) has a 42 percent stake, has a market capitalization of $32 billion after its shares rose 4.4 percent Wednesday on news of the merger talks. Shares of Lorillard jumped more than 10 percent, giving it a market capitalization of $22.7 billion.

Because Reynolds plans to use its own stock to pay for part of the Lorillard deal, BAT's holding in Reynolds would decrease if the merger goes through.

One option is for BAT to help finance Reynolds' bid so it would keep its ownership in the combined company at current levels, one person said. BAT's involvement could also take different forms, another person added.

Reynolds, Lorillard and BAT are working with financial advisers on the proposed deal and talks have been underway for months, the people said, cautioning that there are many moving pieces and discussions could still fall apart.

A merger between Reynolds and Lorillard would create a formidable rival to Marlboro cigarette maker Altria Group Inc (MO.N: Quote), the market leader with a roughly 50 percent share of the U.S. tobacco industry.   Continued...

Danny Herko, senior vice president of Research and Development of R.J. Reynolds Tobacco Company, demonstrates the use of a VUSE Digital Vapor Cigarette at a news conference in New York in this file photo taken June 6, 2013. REUTERS/Zoran Milich/Files