Tobacco Becomes a Hub of M&A Rumor Activity

Despite the growth of the electronic cigarette market, the tobacco industry must still deal with the immediacy of declining sales of traditional combustibles. That's leading to greater speculation that M&A may be the route the smoking giants take. The latest focus of such rumors is British American Tobacco  (NYSEMKT: BTI  ) , the London-based owner of brands such as Lucky Strike, Kent, and Pall Mall, which is said to be eyeing a megamerger in the U.S. market.

According to the London Times, British American Tobacco hired Deutsche Bank to consult on pursuing and financing a deal across the pond. With the value of any deal rumored to be in the billions of dollars, it would likely be a company such as Reynolds American (NYSE: RAI  ) or Lorillard (NYSE: LO  ) that would be the target, and it's more than just speculation to think it might be the former tobacco company as opposed to the latter.

A decade ago, BAT's Brown & Williamson subsidiary combined its assets with RJ Reynolds Tobacco to form the current Reynolds American, which gave the U.K. cigarette company a 42% stake in its American rival. In exchange for accepting the liabilities of B&W, British American Tobacco entered into a 10-year standstill agreement that prohibits it from acquiring any more of Reynolds' stock. As that agreement expires at the end of July, it explains why we're suddenly hearing more about possible M&A activity in the tobacco industry.

Back in March it was rumored Reynolds might be interested in acquiring Lorillard in a megadeal rumored to be valued in excess of $20 billion. Since BAT's voting bloc could nix any sort of deal it would make, we might not see anything happen until the standstill agreement expires. But at that point British American Tobacco could also make a play for Reynolds and afterward go after Lorillard.

Yet it's also possible BAT might not only allow Reynolds to acquire Lorillard first, it could even help finance the transaction, particularly if it sought a majority position in Reynolds beforehand. There seem to be endless combinations possible.

One can't ignore the e-cig market, either, in any of this. Lorillard's blu eCig is the biggest name in the business with a 45% share of the market, but in June both Reynolds and Altria plan to roll out nationally new e-cig brands. Following its successful debut in Colorado and Utah, Reynolds will be going national with its Vuse brand. Similarly, Altria will be taking its new MarkTen brand national then as well, but it also partnered with Philip Morris International to market e-cigs globally. British American Tobacco has its own electronic cigarette, Vype, but a partnership with Reynolds to market or distribute e-cigs is also a distinct possibility.

The real concern here is tobacco, though, as the M&A rumor-mongering is predicated on countering slowing growth. Industry cigarette shipment volumes fell 2.7% last quarter, though after adjusting for wholesale inventory changes, they were down 4.4%. Reynolds says they're down about 3.5% over the past several years. Whether British American Tobacco buys Reynolds, Reynolds buys Lorillard, or there's a three-way combination of the above, it's clear industry investors stand to profit handsomely from some major M&A activity about to be unleashed.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2956409, ~/Articles/ArticleHandler.aspx, 12/22/2014 6:02:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement