Reynolds in talks to acquire Lorillard in merger of tobacco rivals

Tobacco rivals to merge to cut cost and improve profits

New York TimesJuly 11, 2014 

US Tobacco Companies Talks

ASSOCIATED PRESS/2011Camel brand filters cigarettes from Reynolds American Inc., are displayed at a tobacco product store in Cranberry, Pa. Cigarette makers Reynolds American Inc. and Lorillard Inc. say they are in talks of a possible merger that would combine two of the nationís biggest tobacco companies.

KEITH SRAKOCIC — AP

Two of the biggest American tobacco companies said on Friday that they were in talks to merge -- a move to cut costs and shore up profits as the number of smokers shrinks.

A deal between the second-biggest tobacco company in the United States, Reynolds American, and No. 3 Lorillard would unite the maker of the brands Camel and Newport and would create a formidable rival to the industry leader the Altria Group, home of Marlboro.

The complex transaction -- involving not only the two companies, but also British American Tobacco and the Imperial Tobacco Group -- could be announced as soon as early next week, according to people briefed on the matter.

Under the proposed terms of the deal, Reynolds American would buy Lorillard to create a company with a combined market value of more than $56 billion. It would then sell several billion dollars' worth of brands and other assets to Imperial, raising the smaller British rival to the No. 3 position in the United States and potentially assuaging antitrust concerns.

The merger discussions represent the industry's boldest response yet to a declining, if still profitable, market. Declining smoking rates generally and aggressive public health campaigns aimed at curbing smoking have cut into sales in the United States.

About 42 million people in the United States, or about 18.1 percent of the adult population, smoke cigarettes, according to the Centers for Disease Control and Prevention. That compares with about 20.9 percent of the adult population nearly a decade ago and 42.9 percent of the adult population in 1965, according to the centers.

Lately, the industry has seen opportunity in the new business of e-cigarettes. E-cigarettes already have about $2.5 billion in annual sales. Though that is a tiny fraction of the overall tobacco market, e-cigarettes sales are expected to grow quickly in the coming years. Both Reynolds and Lorillard have recently made big pushes into e-cigarettes. A merger could give the companies sufficient scale for the technology and the promotion needed to make what is now a small niche a bigger market.

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