Boston, MA 05/01/2014 (wallstreetpr) – Lorillard Inc. (NYSE:LO) is the third largest cigarette maker in the U.S. The company recently reported a significant drop in profit. Though the decline in profit was to send shares of the company down the drain as is often the case, the opposite is happening. Shares of the tobacco company can be seen going up, and there is a reason for that.
Speculations have intensified that the company could be headed to joining the ranks of the U.S. No. 2 cigarette maker Reynolds American, Inc. (NYSE:RAI). The speculations surfaced in March but now Wells Fargo Co. (NYSE:WFC) believes there is 80 percent probability a deal is in the works between the U.S. No. 2 and No. 3 cigarette companies.
According to Wells Fargo, Reynolds could pay as much as $80 for every share of Lorillard. Shares of Lorillard jumped more than 3 percent to close the previous session at $59.42 following the update on Wells Fargo’s acquisition analysis.
Potential synergies in the deal
Cigarette companies are struggling with shrinking sales and revenue from combustible cigarettes. Tough regulatory measures on smoking and the increasing health awareness have all caused significant and continuing decline of opportunities for tobacco companies. Therefore, the combination of Lorillard Inc. (NYSE:LO) and Reynolds is expected to create a company that can easily and quickly take advantage in the emerging electronic cigarette category. Furthermore, the combination of the companies will lead to significant cost reduction as the companies divest non-core assets and trim the workforce.
The recently published FDA rules regarding e-cigarettes also provide opportunities for tobacco companies to increase investment in the emerging industry.
A third party in the mix
For a deal between Lorillard Inc. (NYSE:LO) to get regulatory approval, Reynolds may have to divest some of its assets. In that case, the third player might be brought on board, and some market observers believe that British American Tobacco could be part of the game. BAT already owns about 42 percent stake in Reynolds.
Lorillard realized net income of $271 million, a 17.4 percent decline from $328 million in Q12013. Revenue was up 1 percent to $1.59 billion.
