Possible Tobacco Mergers/Acquisitions Involving Lorillard..

March 17, 2009 - UBS (a diversified global financial services company) analysts examined three possible situations down the road, and each one of them involved Lorillard, the maker of Newport — the best-selling menthol cigarette in the United States — as well as other brands like Kent, True, Old Gold, Maverick, Satin and Max.

Lorillard is the smallest of the Big Three tobacco giants (mainly because of its golden asset - Newport) and the only one that lacks a smokeless tobacco brand. (The others are Altria, maker of Marlboro purchased of UST (Skoal, Copenhagen)last year for $11 billion, and Reynolds American, maker of Camel, purchased Conwood (Grizzly).)

UBS believes the most compelling deal possibility from both a financial and strategic perspective would be the merger between Reynolds American and Lorrilard. The merger would “substantially strengthen” Reynolds’ cigarette portfolio through Lorillard’s Newport brand and also improve its per-pack profitability, which currently includes a high percentage of discount brands, UBS analysts said in a note to investors. UBS also expected substantial cost and even modest revenue synergies through the joining of both brands within the same retail trade contract.

The second most compelling possible deal would be Lorillard being taken over by Imperial Tobacco of Britain, the maker of brands like Davidoff and Gauloises Blondes, UBS says. Imperial has shown in the past that it is keen on expanding in the United States with recent acquisitions like Commonwealth, Altadis USA and Lignum-2. Adding Lorrilard would give it a stronger base in which to build and market its brands in the lucrative American market.

Even less likely, but still in the realm of possibility, would be for Lorillard to acquire Swedish Match, UBS says. The deal would diversify Lorillard’s product line from just cigarettes to other tobacco-related products like premium hand-rolled cigars, tobacco accessories and smokeless tobacco.

Reference: UBS Looks at Possible Tobacco Deals, Cyrus Sanati, The New York Times Deal Book, 3/6/2009.