* Offers $68.88 per share, premium of 2.5 pct
* To sell Salem, Winston, KOOL and blu brands to Imperial
* BAT to buy shares in Reynolds to keep 42 pct stake
* Lorillard, Reynolds shares down
(Adds more on advisers and executive succession plan,
additional comment from Reynolds' CEO and)
By Anjali Athavaley and Siddharth Cavale
July 15 Reynolds American Inc's proposed $25
billion acquisition of smaller rival Lorillard Inc shows how the
tobacco company is placing its bets on the market for menthols
even as a growing number of smokers opt for e-cigarettes.
With the deal, Reynolds American picks up Newport menthol
cigarettes, one of the few U.S. brands that is gaining share in
a shrinking market. At the same time, Reynolds is giving up blu
- the top-seller in the e-cigarette market seen by many as the
tobacco industry's future - to Britain's Imperial Tobacco Group.
As part of the deal, Imperial will buy Reynolds' Salem,
Winston and KOOL and Lorillard's Maverick brands in a move meant
to ease potential antitrust concerns. Experts say that still may
not satisfy regulators.
Sources familiar with the transaction said gaining the blu
brand made the deal more attractive to Imperial. While cigarette
sales volume has been falling about 4 percent a year,
e-cigarette sales have been booming. Reynolds sells its own
e-cigarettes under the Vuse brand but controls less than 5
percent of the market, according to market research firm
But Reynolds' chief executive officer, Susan Cameron, says
Vuse has a "superior technology" that will make it a strong
contender in the e-cigarette market. The company, which started
selling Vuse roughly a year ago in Colorado and Utah, is rolling
out the product nationwide this quarter.
Meanwhile, Reynolds' purchase of Lorillard's Newport brand
gives the company a stronger presence in the market for menthol
cigarettes. Menthols now make up 31.4 percent of the total
market compared with 26 percent in 2002, according to
"The e-cigarette category is very small today," said
Cameron. "It's growing and consumers are interested in it, but
this transaction is really about adding Newport to our
Menthol is a mint-flavored additive that may reduce the
irritation and harshness of smoking when used in cigarettes,
according to the U.S. Food and Drug Administration.
Experts say menthols have disproportionate popularity among
young people, lower-income smokers and African-Americans. The
FDA last year released a preliminary review that said that a
majority of African-American smokers use menthol cigarettes.
Menthols were also associated with lower socioeconomic status,
according to the FDA review of available studies.
But the deal shows that Reynolds isn't banking on
significant regulation of menthols by the FDA, which regulates
the substance in medical products but not in cigarettes. The
agency is conducting its own studies on the topic and has said
it would consider restricting the use of menthols.
In an interview, Lorillard's CEO, Murray Kessler, said both
companies are confident there is no justification for regulating
menthol cigarettes differently than nonmenthols.
Analysts have also said that smoking-related lawsuits are
leveling off in the United States, making it a ripe time for
consolidation in the industry.
"I think the industry believes the litigation environment is
manageable and has certainly improved over the last decade,"
Still, health advocates have raised concerns that the
proposed acquisition would bring together two companies they say
have a history of marketing to children and minorities.
"A bigger tobacco company is not better for public health,"
said Lisa Henrikson, a senior research scientist at Stanford
Prevention Research Center, part of the Stanford University
School of Medicine.
Lorillard and Reynolds declined to comment.
The companies also downplayed concerns that the deal
wouldn't pass antitrust scrutiny. The planned divestitures could
be just a starting point, with more offered if regulators balk
at allowing the deal, said Andre Barlow, an antitrust expert
with Doyle, Barlow & Mazard Pllc.
"We are very confident we will close this in the first half
of 2015," Cameron said.
Cameron will continue to be president and CEO of Reynolds,
the company said. Kessler will join RAI's board after the
closing of the transaction.
Reynolds, whose brands include Camel and Pall Mall, offered
$68.88 per Lorillard share, representing a premium of 2.5
percent to Lorillard's Monday close.
Lorillard's shares, which have risen about 37 percent since
reports of the deal first surfaced in February, were down 7.5
percent at $62.19 on Tuesday.
Reynolds' shares were down 4 percent at $60.61. Imperial's
shares were down 3.4 percent at 2,647 pence in London.
Including debt, the deal is valued at $27.4 billion.
Reynolds said it expects to have over $11 billion in revenue
and about $5 billion in operating income annually after the deal
closes. Reynolds had sales of $8.24 billion in 2013.
British American Tobacco, Reynolds' largest
shareholder, will buy shares to maintain its 42 percent stake in
Reynolds through a $4.7 billion investment.
BAT's shares were down 1.8 percent at 3,532 pence on the
London Stock Exchange.
Reynolds' financial advisers are Lazard and J.P. Morgan
Securities, while Lorillard is being advised by Centerview
Partners and Barclays Plc.
Legal advisers to Reynolds are Jones Day, while Simpson
Thacher & Bartlett is advising Lorillard.
BAT is being advised by Deutsche Bank and UBS. The legal
advisers to BAT are Cravath, Swaine & Moore and Herbert Smith
Freehills. Credit Suisse and Goldman Sachs advised Imperial.
Allen & Overy represents Imperial Tobacco. The team is led
by London partner Jeremy Parr and U.S. partner Eric Shube and
was supported by Elaine Johnston, David Ernst, Brian Jebb, Shira
Selengut, Mark Davis, Sarah Shaw, Mike Maier, Jochem Beurskens,
Loren Thomas and Natalie Montano. In-house counsel was Anthony
(Additional reporting by Sweta Singh, Sagarika Jaisinghani and
Shailaja Sharma in Bangalore, Martinne Geller in London, and
Jilian Mincer in New York; Editing by Saumyadeb Chakrabarty and