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Could This Massive Tobacco Merger Be More Than Just Rumor?

By Mark Reeth and Sean O'Reilly - Mar 9, 2014 at 10:00AM

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Rumor has it Reynolds American is considering buying Lorillard. Could this be more than just speculation?

Rumors have been circulating this week that Reynolds American ( RAI ) is thinking of acquiring Lorillard ( LO.DL ), effectively combining the second and third largest tobacco companies in the U.S. In this segment from Thursday's Consumer Countdown, Motley Fool analyst Sean O'Reilly and Mark Reeth take a look at the tobacco business. Sean points to just how difficult organic growth in this segment in the U.S. can be with such a saturated market, and says that acquisitions may be the only option for these companies to grow.

While any acquisition here is still nothing more than speculation, Mark sees it as a deal that could soon be very necessary for Lorillard. With the company's strong specialization in menthol cigarettes, and Europe having moved to ban menthol and the FDA now weighing the evidence toward potentially making a similar move, being acquired by Reynolds American could be the safety net the company needs at just the right time. If these rumors don't materialize into an actual acquisition offer however, or if regulators decide that such a merger would create too large a company in this industry and strike the deal down, Mark says he would be staying away from Lorillard, and that Reynolds American, or the number one player in the space, Altria ( MO 0.14% ), would be much more sensible buys in his eyes today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Reynolds American Inc. Stock Quote
Reynolds American Inc.
Lorillard, LLC Stock Quote
Lorillard, LLC
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$44.49 (0.14%) $0.06

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