New Buzz Around Reynolds-Lorillard Merger

WINSTON-SALEM, N.C. -- Talk of two tobacco giants merging is heating up again.

Buzz surrounding a possible merger between Reynolds American Inc. (RAI) and Lorillard Inc. has picked up again on news that Imperial Tobacco is planning to sell 30 percent of its stock in its Madrid unit, Compania de Distribucion Integral Logista Holdings SA, next month to raise about $800 million. This move may put Bristol, England-based Imperial in a better position to acquire the assets RAI and Lorillard would be forced to sell for regulators to greenlight a deal, according to Bloomberg.

"The Logista IPO may help set the Reynolds-Lorillard deal in motion again," Philip Gorham, an analyst with Morningstar Inc. in Amsterdam, told the news outlet. "It gives Imperial a bit of leeway to help finance the brand acquisitions and give its U.S. business scale."

A deal between Winston-Salem-based RAI and Greensboro, N.C.-based Lorillard would rank as the biggest-ever tobacco merger, creating a company with more than $13 billion in annual sales, according to data compiled by Bloomberg.

The possibility of an RAI-Lorillard deal came to light in March. Since then, the probability of a potential merger has gone up and down, with talk remaining relatively quiet in recent weeks.

In a research note released on April 29, Bonnie Herzog, managing director of tobacco, beverage and consumer research at Wells Fargo Securities LLC, said RAI "has an appetite for acquisitions" and the tobacco company is always looking for an attractive asset or technology that it could acquire at the right price, as CSNews Online previously reported.

At the time, Herzog put the probability that RAI would acquire Lorillard at 80 percent, with RAI paying up to $80 per share and incorporating synergies and cost savings of around $400 million.

Also adding fuel to the merger talks was a mid-May report that British American Tobacco (BAT) tapped Deutsche Bank to work alongside UBS, the company's financial adviser, and recommend how it should pursue and finance deals in America. London-based BAT's move to investigate a U.S. deal comes as a pact with RAI nears its expiration date. BAT acquired 42 percent of RAI a decade ago under a signed agreement that prevented a hostile takeover.

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