RAI Takes Lorillard in $27.4B Deal

WINSTON-SALEM, N.C. -- It's official. After months of speculation, Reynolds American Inc. (RAI) is acquiring Lorillard Inc. in a transaction valued at $27.4 billion. The announcement comes several days after the No. 2 and No. 3 U.S. tobacco giants confirmed they were in talks to merge.

Under the terms of the transaction, which has been approved by the boards of directors of both companies, Lorillard shareholders will receive, for each Lorillard share, $50.50 in cash and 0.2909 of a share in RAI stock at closing, representing $68.88 per share based on RAI's closing share price on July 14.

This represents a premium of 40.4 percent to the stock price on Feb. 28, the last trading day prior to initial media speculation around a possible transaction, and a premium of 12.6 percent to the stock price on July 2, prior to more recent news reports, according to release on the transaction.

Following the transaction, RAI is projected to have more than $11 billion in revenues and approximately $5 billion in operating income, and its operating companies will have growth pillars across key industry categories: Newport, Camel, Pall Mall and Natural American Spirit in combustible cigarettes; Grizzly in smokeless tobacco; and VUSE in the growing electronic cigarette market. 

Susan Cameron, RAI's president and CEO, will continue in that role after completion of the acquisition, and the company will remain headquartered in Winston-Salem. Murray Kessler, Lorillard's chairman, president and CEO, will join RAI's board after the closing.

"Reynolds American and Lorillard have complementary core strengths and the addition of Newport to our operating companies' existing key brand portfolios -- including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly -- will enhance our ability to compete in the combustible cigarette and smokeless categories," Cameron said. "We are also confident in R.J. Reynolds Vapor Co.'s digital vapor cigarette VUSE, which offers superior technology and has received very positive early results in its national rollout. This transaction will provide RAI with additional resources to invest in innovation, [research and development] and its operating companies' brands. This will benefit adult tobacco consumers and wholesale and retail customers alike."

In conjunction with the Lorillard acquisition, Imperial Tobacco Group plc will purchase the KOOL, Salem, Winston, Maverick and blu eCigs brands and other assets and liabilities for a total consideration of $7.1 billion in cash. RAI expects to receive net cash proceeds of approximately$4.4 billion after taxes. The addition of these brands to Imperial's U.S. operations will more than triple its share of the U.S. cigarette market, position it for long-term success in traditional tobacco products and the growing e-cigarette category, and elevate it to the status of a major U.S. competitor for the first time. 

As part of the divestiture, Imperial will acquire certain assets owned by Lorillard including its manufacturing and research and development facilities in Greensboro and approximately 2,900 employees, including a national sales force. The closing of the sale of these assets to Imperial is conditioned upon, among other things, RAI's completion of the acquisition of Lorillard.

"We are proud of Lorillard's record of shareholder value creation and operational success, and we view this transaction, which provides a significant premium to our shareholders, as the culmination of our efforts," Kessler said.  "Importantly, we consider these transactions not only a win for our shareholders, but also a win for our customers, consumers and employees. We look forward to working with Reynolds American and Imperial to complete these transactions."

British American Tobacco (BAT), RAI's largest shareholder, has reiterated its strong confidence in the prospects of RAI and is fully supportive of, and has agreed to vote its shares in favor of, the transaction. As part of the transaction, BAT will maintain its 42-percent ownership in RAI through an investment of approximately $4.7 billion.

"We are confident in the strategic and financial merits of these transactions," Nicandro Durante, CEO of BAT, said. "Additionally, we find the long-term prospects of this combination compelling, which is why we are making an additional investment in Reynolds American.

RAI's acquisition of Lorillard is expected to be accretive in the first full year, with strong double-digit accretion in the second year and beyond, according to the two companies.