R.J. Reynolds Ready to Deal

R.J. Reynolds Tobacco Holdings Inc. said that it had engaged in talks with another company about a possible joint venture, partnership or acquisition and while those talks have ended, it is still looking at possible deals.

The comments, made by company officials during a morning conference call, sparked renewed interest in deals the number-two U.S. cigarette company could be seeking in the tobacco sector, according to the Associated Press.

R.J. Reynolds did not identify the company it had negotiated with for five months before talks terminatied. But it said the company was in an area in which Reynolds has expertise and which would offer synergies.

"In my view, the company's intent in discussing that deal this morning was to extend in the eyes of the market the time it might take to find and conclude an attractive deal," Salomon Smith Barney tobacco analyst Martin Feldman told the A.P.
Some, including Feldman, have suggested that R.J. Reynolds had been in talks with chewing tobacco maker UST Inc., the report said. Feldman even went so far last August as to suggest that Reynolds acquire UST. Both Reynolds and UST declined to comment on such speculation, however.

Credit Suisse First Boston tobacco industry analyst Bonnie Herzog is "very confident" that R.J. Reynolds talked to UST in the past but thinks it's now moved to other possibilities.

Herzog suggested that R.J. Reynolds could look to make a deal with Newport cigarette maker Lorillard, which is a unit of Loews Corp., the report said. "Lorillard to me is the answer," she said. "It gives them scale, it gives them a very strong brand to compete against Philip Morris, and it's basically what they need to try and win this game. I think it would be one of the best combinations out there."

Lorillard has not commented on such speculation.

Newport is the number-two U.S. cigarette behind Philip Morris Cos. Inc.'s Marlboro brand. Adding Newport to R.J. Reynolds' portfolio, which already includes Camel, Winston and Salem, would enhance the company?s ability to negotiate better slotting space with retailers.

"With a brand like Newport, R.J. Reynolds would have more scale, and therefore more power with the retail channel," Herzog said. But any such deal would likely face heavy scrutiny from regulators, Herzog cautioned. R.J. Reynolds provided no other details on its plans but said it is still looking for possible deals.

While Feldman did not name a specific company that might interest Reynolds, he did say last August that he saw UST as a possible acquisition target. Shares of both companies jumped on the acquisition speculation at that time, and Feldman repeated his idea of a bid for UST last December, the report said.
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