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So what: The deal between the nation's No. 2 and No. 3 tobacco companies had been expected for weeks, so shares of Lorillard, the No. 3 producer, had already been bid up. Reynolds American agreed to purchase Lorillard for $68.88 per share but will spin off some key brands, including blu, the leading e-cigarette brand. Kool, Salem, and Winston will also be sold to the Imperial Tobacco Group. Still, investors didn't seem to like the blu divestiture, as shares of Reynolds American also dropped 6.9% on the news.
Now what: While the $68 purchase was slightly higher than Lorillard's closing price last night, most analysts had expected the sale to be for over $70 a share. Reynolds also seems to believe its Vuse brand of e-cig has better technology, and sales of blu have declined sequentially in recent quarters. The blu sale also makes the deal more likely to pass antitrust merger. Finally, the acquisition makes clear the few growth opportunites left in tobacco, which are mainly e-cigs, which is a small market, and menthols, which Lorillard dominates with its Newport brand. For a dividend play, these stocks are solid, but I'd expect growth to only get tougher going forward.
Jeremy Bowman and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.