Speculation Grows Around Reynolds-Lorillard Deal

WINSTON-SALEM, N.C. -- Where there's smoke, there's often fire.

There certainly has been plenty of speculation lately about a future merger between Reynolds American Inc. (RAI) and Lorillard Inc., with both Bonnie Herzog, director of tobacco, beverage and consumer research at Wells Fargo Securities LLC, and financial TV network CNBC stating such a deal is imminent.

Another potential scenario was presented on Wednesday, however, when the U.K. Daily Mail reported that London-based British American Tobacco (BAT) could buy RAI instead. BAT already owns 42 percent of Winston-Salem-based RAI, whose brands include Camel, Kool, Winston and Salem.

According to industry rumors, BAT could buy RAI for $75 per share. RAI's stock currently trades for more than $62 per share.

Investment bank Citigroup said the proposed acquisition would be excellent for BAT, as it could increase earnings, gain a top global electronic cigarette platform and obtain access to RAI's heat-not-burn technology.

Herzog believes a BAT-RAI combination makes strategic sense, but she continues to think a RAI-Lorillard deal is more likely. "We believe [incoming President and CEO] Susan Cameron's return to the helm of RAI was driven by the board's vision to have her lead the company into the next stage of growth, not simply to help facilitate a sale transaction to BAT within a few months," she commented. 

However, even if a BAT-RAI deal is consummated, don't expect Lorillard to be left at the altar. "Even if a BAT-RAI deal were to occur, we continue to believe that ultimately a transaction to buy [Lorillard] will likely follow with the combined BAT-RAI paying up to the $80 range, but more likely in the mid-$70 range," Herzog wrote Wednesday in a research note.