Rumors have been circulating this week that Reynolds American (NYSE:RAI) is thinking of acquiring Lorillard (UNKNOWN: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 (NYSE:MO), would be much more sensible buys in his eyes today.
Mark Reeth has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.