Lorillard and Reynolds Reshaping Tobacco in Merger

Lorillard and Reynolds American are currently in the last stages of agreeing to a merger that would reshape tobacco by uniting two of the three biggest operators in the U.S. with a market capitalization combined of $56 billion.

The deal will affect two big rivals in the UK – British American Tobacco, which owns 42% of Reynolds, and Imperial Tobacco, which confirmed previously it would buy assets from the group that results from the merger.

Lorillard, Reynolds and BAT agreed to key elements in the deal, including total price and are currently finalizing the details like, which brands of cigarettes and facilities for productions will be disposed of to lessen any concerns over antitrust.

The negotiations between the three tobacco giants have been ongoing since early in 2014. However, over the past couple of days the talks have intensified and all parties hope to make an announcement about the deal as soon as this coming week.

As long ago as March, it was reported that Lorillard and Reynolds were working on a merger. However, concerns about competition regulators and the complexity of British American Tobacco owning 42% of Reynolds stymied the efforts to reach a deal.

Brands from Reynolds include Kool, Pall Mall and Camel. Brands made by Lorilland include Old Gold, Kent and Maverick, though over 80% of sales by Lorillard come from its menthol cigarette brand Newport, that have been able to buck the trend of declining rates of smoking in the U.S.

One of the biggest markets in the world for tobacco is the U.S., with sales annually reaching $90 billion, though it has contracted 3% annually.

Lorillard and Reynolds in market share trail Altria, which represents close to 50% of all U.S. cigarette sales through its division of Philip Morris. The Marlboro cigarettes the company make alone own over 44% of the market.

Imperial Tobacco only has a U.S. market share of 3%.

Analysts believe that Imperial will want to acquire a number of cigarette brands from Reynolds including Salem, Winston and Kool, its menthol brand.

The analysts said the transaction would prove positive for the tobacco industry globally and the underlying catalyst is e-cigarettes and vapor, which could prove to be just the start of other global consolidations in the industry.