US cigarette-maker rivals in mega merger to counter the slowdown in sales

Reynolds, whose brands include Camel and Pall Mall, offered $68.88 per Lorillard share, representing a premium of 2.5 per cent to Lorillard’s Monday closing.

Lorillard’s shares, which have risen about 37 per cent since reports in February of a possible deal, were down 5.5 per cent at $63.50 yesterday. Including debt, the deal is valued at $27.4bn.

The deal gives Reynolds, the second-largest cigarette maker in the United States, the leading US menthol cigarette Newport.

Analysts say the deal will help the No. 2 and No. 3 US players compete with Marlboro maker and No. 1 Altria Group in a market where sales volume is falling about 4 per cent a year as more Americans quit smoking.

Despite the decline, the United States remains the biggest tobacco market in the world after China and the most profitable.

Reynolds also said it would sell its KOOL, Salem and Winston and Lorillard’s Maverick and blu eCigs brands and other assets to Britain’s Imperial Tobacco Group for $7.1bn in cash to address antitrust issues.

Analysts had not expected the blu brand to be part of Imperial’s haul from the deal, plans for which were first reported in May.

“Blu was probably the sweetener that persuaded them to pick up what can probably most politely be described as third-tier brands,” said Philip Gorham, an analyst with research firm Morningstar.

After adjusting for the present value of tax benefits, expected at $1.5bn, Imperial said the net price of $5.6bn implied a multiple of 6.9 times the brands’ core earnings or EBITDA.

British American Tobacco, Reynolds American’s largest shareholder, will buy more shares to maintain its 42 per cent ownership in Reynolds through a $4.7bn investment.