Reynolds cigarettes to buy Lorillard in $27B US merger

Cigarette maker Reynolds American Inc. is planning to buy rival Lorillard Inc. for about $25 billion US in a deal to combine two of the oldest and biggest tobacco companies in the U.S.

The deal announced Tuesday would create a formidable No. 2 to rival Altria Group Inc., owner of Philip Morris USA, and will likely face scrutiny from regulators. It also could spur a wave of consolidation in the tobacco business, shrink factories and work forces, and push prices for cigarettes higher even as smokers buy fewer of them. The companies value the deal at about $27 billion, including debt.

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The companies said they will sell the Kool, Salem, Winston, Maverick and blu eCigs brands to Imperial Tobacco Group for $7.1 billion to ease regulatory concerns about competition. Imperial also will acquire Lorillard's manufacturing and research and development facilities in Greensboro, North Carolina, and about 2,900 employees. Imperial owns Bowling Green, Kentucky-based Commonwealth Brands Inc., maker of USA Gold cigarettes.

Together, the combined company would sell one out of every three cigarette products sold in America.

The planned merger comes as demand for traditional cigarettes declines in the face of tax increases, smoking bans, health concerns and social stigma. U.S. cigarette sales fell about 2.6 per cent last year to 285 billion cigarettes, according to market researcher Euromonitor International.

But raising prices and cutting business costs has kept the industry handsomely and reliably profitable. The companies also have cut costs to keep profits up, and the larger scale of a combined company could make future cost-cutting easier.

The next step for tobacco companies is an increased focus on cigarette alternatives - such as electronic cigarettes, cigars and smokeless tobacco - for sales growth.

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Reynolds markets Camel, Pall Mall and Natural American Spirit cigarettes, as well as the Grizzly and Kodiak smokeless tobacco brands. It has about 27 percent of the U.S. retail cigarette market. Reynolds, based in Winston-Salem, North Carolina, also expanded its Vuse brand e-cigarette nationally last month. It has about 5,200 full-time employees and produces its cigarettes at its two-million-square-foot Tobaccoville, N.C., plant.

Reynolds' profit rose 35 percent to $1.72 billion last year on revenue of $8.24 billion, excluding excise taxes.

Lorillard, which was founded before the Revolutionary War and is the oldest continuously operating U.S. tobacco company, was spun off from Loews Corp. in 2008. The Greensboro, North Carolina-based company has about 15 percent of the retail market, bolstered by its flagship Newport cigarette brand, which commands 37.5 percent of the menthol cigarette market.

Lorillard became the first major tobacco company to jump into the e-cigarette market when it acquired the Blu e-cigarette brand in 2012. Blu now accounts for almost half of all e-cigarettes sold. Lorillard's profit rose 8.5 percent to $1.19 billion last year on revenue of $4.97 billion, excluding excise taxes.

The combined company also would challenge Richmond, Virginia-based Altria, which holds about half of the retail cigarette market, led by its top-selling Marlboro brand. It also sells Black & Mild cigars, Copenhagen and Skoal smokeless tobacco and is expanding MarkTen e-cigarette brand nationally.

Altria, Reynolds American and Lorillard all sell cigarettes only in the U.S. Other companies sell their brands overseas.

The companies said British American Tobacco PLC, which makes Kent and Dunhill cigarettes overseas will maintain its 42 percent stake in Reynolds, and Lorillard shareholders will hold a 15 percent stake. Reynolds and British American Tobacco also agreed to share technology related to the development and commercialization of next-generation tobacco products, including heat-not-burn cigarettes and other nicotine-delivery products.