June 4 (Bloomberg) -- Lorillard Inc., the cigarette producer being spun off by Loews Corp., may attract takeover bids from Reynolds American Inc. and Imperial Tobacco Group Plc as shrinking U.S. cigarette demand forces manufacturers to combine, according to reports from two analysts.

Lorillard will be spun off June 10 and trade on the New York Stock Exchange. Investors should buy the stock to take advantage of a potential merger, a possible share buyback and its addition to the Standard & Poor's 500 index, Erik Bloomquist, an analyst at J.P. Morgan Securities Ltd., said today in a research note.

``It's very clear the industry will see more consolidation,'' Filippe Goossens, a Credit Suisse analyst in New York, said today in an interview. ``Companies with a larger share of the market and greater pricing power will become more important to address above-trend volume declines for the cigarette industry.''

Goossens and Bloomquist believe Reynolds, the second- largest U.S. tobacco company, may try to buy Lorillard in the next year or two. Another possible bidder is London-based Imperial, which last year acquired Commonwealth Brands, the fourth-largest U.S. cigarette maker.

In the spinoff, holders of Loews and its Carolina Group tobacco tracking stock will get shares of Greensboro, North Carolina-based Lorillard. New York's Tisch family runs Loews, an insurance, hotel and tobacco holding company.

Carolina Group advanced $1.50, or 2.1 percent, to $73.81 at 4 p.m. in New York Stock Exchange trading, a day after S&P said Lorillard will replace Ambac Financial Group Inc. in the 500-stock index.

`Attractive' Target

``Lorillard is likely to be attractive to competitors,'' Bloomquist wrote in a separate June 2 note to clients. He rates Carolina Group as ``overweight'' while Goossens rates it ``outperform.''

Nik Modi, an analyst at UBS Securities LLC, agreed. In a research note today, Modi called Lorillard a ``prime M&A target.''

Ron Milstein, Lorillard's general counsel, didn't return a telephone call seeking comment.

Maura Payne, a Reynolds spokeswoman in Winston-Salem, North Carolina, declined to comment, as did Simon Evans, a spokesman for Imperial Tobacco.

Buying Lorillard would possibly require Reynolds to sell menthol brands Kool and Salem to satisfy U.S. antitrust regulators, Bloomquist said.

Newport's Share

Lorillard, led by Chief Executive Officer Martin Orlowsky, increased Newport's share of U.S. smokers to 9.85 percent in the first quarter, up 0.3 percentage point from a year earlier. Menthol cigarettes including Altria Group Inc.'s Marlboro and Reynolds's Kool accounted for 28.4 percent of the U.S. cigarette market, Orlowsky told analysts April 28.

Lorillard shipped 7.65 billion Newport cigarettes in the first quarter, 1 percent less than a year earlier. Total U.S. cigarette shipments dropped faster, falling 3.3 percent, Orlowsky said.

Declining shipments to distributors may accelerate if Congress boosts federal excise taxes next year and the new president signs the law, analysts said. President George W. Bush twice vetoed a 61-cents-a-pack increase last year.

An increase of that amount in 2009 would require manufacturers to raise prices 8 cents to 10 cents a pack to cover profit lost to lower shipments, Bloomquist said.

Lorillard, which increased Newport prices by 10 cents a pack last month, ``is outperforming its competitors in sales and volumes,'' Bloomquist said.

Following the spinoff, the company may announce plans to repurchase $1.5 billion in shares, or 12 percent of its market value, the analyst said.

Altria Group Inc., based in Richmond, Virginia, is the largest U.S. tobacco company.

To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net.

Last Updated: June 4, 2008 16:07 EDT