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Tobacco Industry Seeing Major Change with Purchase of Lorillard by Reynolds
It was announced on Tuesday that Reynolds American Inc. will buy Lorillard Inc. for $25 billion excluding debt, according to Bloomberg. These are two of the biggest companies in the tobacco industry in the United States. The deal will leave two companies in control of 90 percent of the tobacco industry in the country.
Reynolds makes Pall Mall and Camel cigarettes. It is going to pay cash and stock with a value of $68.88 per share, according to the statement. The British American Tobacco Plc will fund $4.8 billion of the deal, which allows it to keep a 42 percent stake in Reynolds.
In an effort to remove antitrust concerns, Imperial Tobacco Group Plc will pay $7.1 billion to acquire Kool and Blu e-cigarettes.
Owen Bennett is an analyst at Nomura Holdings Inc. in London. Bennett said, “There’s a lot of risk. There are a lot of factors involved.”
When debt is including, the purchase will reach $27.4 billion. The newly created company will boast $11 billion of annual revenue. This is close to two-thirds the annual sales of United States leader Altria Group Inc. It will have an operating income of $5 billion.
According to Reynolds, the combined company is going to account for 33 percent of the country’s industry. This will leave two competitors in the market selling nine of every 10 cigarettes. Imperial announced that its market share is going to triple to 9.5 percent from 2.5 percent.
The deal is going to have to pass antitrust hurdles, which is why Imperial is going to acquire Winston, Salem and Maverick.
Philip Gorham is an analyst from Morningstar Inc. in Amsterdam. Gorham said, “The most surprising element is that Imperial is taking the e-cigarette business from Lorillard. It was probably the sweetener that convinced them to buy what is essentially a selection of third-tier brands.”
In the announcement, Reynolds said that the deal will help save the company $800 million in costs per year.
Imperial Tobacco is being represented by Credit Suisse Group AG and Goldman Sachs Group Inc.Reynolds American Inc. Buying Lorillard Inc. by Jim Vassallo