Boston, MA 05/29/2014 (wallstreetpr) – Lorillard Inc. (NYSE:LO) and Reynolds American, Inc. (NYSE:RAI) are reportedly drifting towards a deal in their merger talks. The combination of the two giant cigarette companies may spell doom for Altria Group Inc (NYSE:MO) that enjoys the biggest control of the cigarette industry in the U.S.
According to a recent survey on the possible merger of Lorillard and Reynolds, a majority of retailers expressed their support for the tie-up of Lorillard and Reynolds. The retailers mostly cited the possibility of the combined company diluting the influence that Altria enjoys in the cigarette market.
Furthermore, the combination of the two companies would likely support their quick penetration into the lucrative electronic cigarette market. Lorillard Inc. (NYSE:LO) already controls a significant share of the e-cigarette market and Reynolds is expected to launch its own brand later this year.
As for the shareholders, the combined company would likely have streamlined operations in the sense of few contracts, products and sales rep that in turn would reduce operating costs. The combined company would also effectively compete with the market leader Altria in generating higher revenue.
E-Cigarette
Experts project that sales of e-cigarettes would outpace the sale of traditional cigarettes by 2020. Tobacco companies in the U.S. and elsewhere are seeking bigger presence in the e-cigarette market because of the huge profit potential. The fact that Lorillard’s Blu e-cigarette already controls about 50 percent of the U.S. market suggests the company offers its acquirer an added advantage in penetrating the e-cigarette market.
Complex Combination
Regulators may not readily approve the tie-up of Lorillard Inc. (NYSE:LO) and Reynolds American, Inc. (NYSE:RAI) because of antitrust issues. In order to beat the regulatory objection of a merger of the U.S. No. 2 and No. 3 cigarette providers, British American Tobacco PLC (ADR) (NYSEMKT:BTI) is cited as a possible third player in the deal especially where the regulators may ask for assets divestment to secure approval. British American Tobacco already owns about 42 percent stake in Reynolds and was itself rumored to be circling either Lorillard Inc. (NYSE:LO) or Reynolds American, Inc. (NYSE:RAI) for a tie-up deal.
