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BAT Advances Amid Speculation of Reynolds Bid for Lorillard

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May 22 (Bloomberg) -- British American Tobacco Plc, Europe’s biggest cigarette maker, rose in London trading on speculation that the company may help fund a bid for Lorillard Inc. by Reynolds American Inc.

The shares advanced as much as 2.8 percent, the steepest intraday gain in more than a month. They were up 2.5 percent at 3,614 pence as of 8:47 a.m., valuing the London-based company at about 67.8 billion pounds ($115 billion).

Reynolds is in advanced talks to acquire Lorillard, a deal that could take the form of a three-way transaction with BAT taking a “major role” in backing the merger, Reuters reported late yesterday. By providing funds, BAT might be able to maintain its 42 percent stake in Reynolds, which has a market value of $32 billion, Reuters said.

“We don’t know precisely what, if any, transaction could emerge, but we suspect that assuming one does it will be advantageous for BAT,” Adam Spielman, an analyst at Citigroup Inc. in London, said in a note.

U.S. tobacco companies are grappling with declining smoking rates, sales taxes and a shift toward e-cigarettes. Last year, Americans spent $88.9 billion on tobacco products, down from about $111 billion a decade earlier, according to data compiled by Bloomberg from the Tobacco Merchants Association. A tie-up of Reynolds and Lorillard is one possibility for mergers aimed at restoring long-term growth, and the merged company may appeal to BAT, Kenneth Shea, an analyst for Bloomberg Industries, said in March.

Lorillard Gains

BAT declined to comment on “rumors or speculation.” Bob Bannon, a spokesman for Greensboro, North Carolina-based Lorillard, declined to comment on the report. Bryan Hatchell, a spokesman for Winston-Salem, North Carolina-based Reynolds, didn’t respond to messages seeking comment.

Lorillard rose 10 percent to $62.63 in New York yesterday, valuing the maker of brands including Newport and Maverick at $22.7 billion. The stock was at $62.59 in early German trading. Reynolds, whose brands include Camel and Pall Mall, traded at $62.06 at 10:42 a.m. in Germany after gaining 4.4 percent to $59.77 yesterday.

Merger speculation has propelled Lorillard shares up 24 percent this year, while Reynolds stock has risen almost 20 percent. The two companies are the biggest sellers of tobacco in the U.S. after Marlboro-maker Altria Group Inc.

Brand Tie-up

“If the reports prove correct, we suspect the aim is to create a company containing the Newport, Camel, Pall Mall, Natural American Spirit and Grizzly brands, which would make a formidable competitor in the U.S.,” Citigroup’s Spielman wrote in the note. Other brands would likely have to be sold for antitrust reasons, according to the analyst.

Imperial Tobacco Group Plc may be interested in assets that were made available for sale, Spielman said.

“If Imperial were able to pick up a bundle of brands in the U.S. at a value-accretive price, it could benefit materially,” he said.

A spokesman for Bristol, England-based Imperial declined to comment on whether the company would be interested in purchasing any brands from a merged company. The stock gained 1.8 percent to 2,694 pence at 9:47 a.m. in London.

A combination of Reynolds and Lorillard would be “excellent news” for BAT, James Bushnell, an analyst at Exane BNP Paribas in London, said in a note today.

While antitrust hurdles to a deal remain “considerable,” a merger of the companies would bring “huge” cost synergies and value accretion for Reynolds, Bushnell wrote.

To contact the reporter on this story: Paul Jarvis in London at pjarvis@bloomberg.net

To contact the editors responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net Thomas Mulier, David Risser

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