July 11 (Bloomberg) -- Reynolds American Inc., the producer of Camel cigarettes, said it’s in talks to acquire Lorillard Inc. in a transaction that would create a closer competitor to U.S. tobacco market leader Altria Inc.
Lorillard also confirmed the discussions in a statement today, following reports that a transaction may be close after months of negotiation. British American Tobacco Plc, the U.K. company which owns 42 percent of Reynolds, said it expects to support the transaction by subscribing for additional shares to maintain its stake. Separately, Imperial Tobacco Group Plc said it’s in talks with the U.S. companies to buy some brands.
The transaction -- which would follow months of on-again, off-again talks -- is complicated by its size and the involvement of several companies. Together, Reynolds and Greensboro, North Carolina-based Lorillard have a market value of about $56 billion and annual sales of more than $13 billion, according to data compiled by Bloomberg. Merger speculation has propelled stocks of both companies this year.
“This confirms what we’ve known -- that the U.S. cigarette industry is heating up,” Chris Wickham, an analyst at Oriel Securities in London, said by phone. “This is the first stage for some big battle lines that are being drawn.”
Lorillard rose 4.9 percent to $66.20 at 8:12 p.m. in New York before the market opened, giving the company a market value of about $24 billion. Reynolds advanced 2 percent to $63.50. BAT gained 0.3 percent to 3,532 pence in London trading, while Imperial Tobacco rose 2.3 percent to 2,720 pence.
An agreement could be announced as early as July 14, people familiar with the situation said. There is no guarantee a deal will get done, the companies said in separate statements.
If the three companies reach an agreement, Lorillard’s biggest brand, Newport, would join Camel as the combined company moves to compete with Altria, whose brands account for more than half of the U.S. retail cigarette market. Altria’s Marlboro by itself has market share in the U.S. of about 44 percent, according to the company’s website.
As part of the deal, Imperial Tobacco will buy some brands from Reynolds and Lorillard in an effort to head off any antitrust concerns that the U.S. government may have, according to people familiar with the matter. The U.K. company is lining up as much as $7 billion to fund such a purchase, they said.
Imperial is most likely interested in Reynolds’s Kool, Winston and Salem brands, though may also be attracted by Lorillard’s Maverick discount label, according to Erik Bloomquist, a tobacco analyst at Berenberg Bank in London.
“To finance this deal they would have to do a rights issue and go back to the shareholders for money,” Bloomquist said. “I don’t think the balance sheet could support a deal of this size.”
An Imperial Tobacco spokesman declined to comment on how the company would finance the acquisition.
Reynolds, Lorillard and London-based BAT have been in talks since last fall to reach an agreement that would satisfy all three parties, people familiar with the matter have said. They had made a tentative deadline of July, those people said, because of a standstill agreement by BAT not to raise its stake in Reynolds, without the approval of Reynolds’s board, until this month.
Shrinking U.S. demand for cigarettes is putting pressure on tobacco companies to team up. Cigarette shipment volumes fell by a median of 2.9 percent among the industry’s top U.S. companies, according to data compiled by Bloomberg Industries. While electronic cigarettes offer a growth opportunity, that market is still young and faces mounting regulation.
BAT’s agreement keeping it from increasing its stake in Reynolds dates back to the merger of R.J. Reynolds Tobacco Holdings Inc. with Brown & Williamson Tobacco. The expiration could open the door to the companies working closer together amid a broader push for industry consolidation.