Seeking Alpha

Reynolds American buys Lorillard in $27.4B deal

  • Reynolds American (NYSE:RAI) announces it will buy Lorillard (NYSE:LO) in a deal valued at $27.4B.
  • Lorillard shareholders will receive $50.50 in cash and 0.2909 a share of Reynold at closing, which reps a deal price of $68.88 at Reynold's current trading level.
  • British American Tobacco (NYSEMKT:BTI) will hold on to its 42% stake in Reynolds as part of the deal.
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Comments (30)
  • R.Fitz
    , contributor
    Comments (600) | Send Message
     
    Somebody getting a bargain, and it isn't me
    15 Jul 2014, 07:21 AM Reply Like
  • jt380
    , contributor
    Comments (84) | Send Message
     
    Couldn't agree more Fitz
    15 Jul 2014, 07:38 AM Reply Like
  • frrizzo380
    , contributor
    Comments (934) | Send Message
     
    As a LO shareholder this deal sucks.
    15 Jul 2014, 07:48 AM Reply Like
  • wizjinx
    , contributor
    Comments (438) | Send Message
     
    Do we get a vote on this thing?
    15 Jul 2014, 07:49 AM Reply Like
  • frrizzo380
    , contributor
    Comments (934) | Send Message
     
    Yes.
    15 Jul 2014, 07:50 AM Reply Like
  • Tradevestor
    , contributor
    Comments (4139) | Send Message
     
    A bit disappointed but we still get $50 + some shares of RAI that will be valued at $68 or so.

     

    But a better deal for RAI than for LO shareholders imo.
    15 Jul 2014, 08:05 AM Reply Like
  • NJMASC
    , contributor
    Comments (15) | Send Message
     
    "contributors" - please elaborate why the deal sucks.

     

    LO has run up huge into this news already. $68 and change is not high enough for you , I get it. Did you all just buy yesterday and were hoping for a $75 price? Of course everyone wanted a higher price. But why does it suck?

     

    I've been long since $30s and actually buying some more today in the pre while temporarily down on this news. I think this deal goes through thanks to British help.
    15 Jul 2014, 08:13 AM Reply Like
  • fatbaboon
    , contributor
    Comments (251) | Send Message
     
    I have owned this company since it was a Carolina Group tracker but I am not at all pleased with this deal. Newport is a premium asset in a industry where there are no premium assets for sale, and we are living in a world of ultra low interest rates. Our company is worth more that 13* trailing ebitda. I would prefer to go back to where we were last year. I feel like I had a bush that would give me a bird a year for the rest of my life and some idiot has come along given me two birds and burnt down the bush.

     

    I just don't get the motivation here (unless management has been bought). They are gutting Lorillard. Selling Blu to Imperial. Moving Newport manufacturing to Reynold's. Breaking up the Newport salesforce. That is something I find unbelievable. Newport is the greatest success story of the last decade - winning share year in and year out - and here we have a deal that is done at an average valuation and involves breaking up Newport's salesforce and manufacturing.
    15 Jul 2014, 01:17 PM Reply Like
  • Wallrus St.
    , contributor
    Comments (14) | Send Message
     
    FTC has to bless it, not a done deal...sit tight.
    15 Jul 2014, 08:21 AM Reply Like
  • omooc
    , contributor
    Comments (341) | Send Message
     
    I share NJMASC's sentiment. A few days ago, LO was in the low 60s; now, the high 60s. If an investor does nothing but hold onto the shares, why is a 10% increase inadequate? Kindly explain. omooc
    15 Jul 2014, 08:32 AM Reply Like
  • coolcat28
    , contributor
    Comments (171) | Send Message
     
    I'll kindly explain, people who were knowledgable about the merger said the deal would be between $75-$80 a share. $68 is lower than $75, and a lot of the deal is subject to capital gains because it's in cash, i hope this clears things up for you.
    15 Jul 2014, 08:48 AM Reply Like
  • trader_murf
    , contributor
    Comments (52) | Send Message
     
    Forgot about the cap gains on the cash ugh. Thanks for the info helps me plan should the deal go thru.
    15 Jul 2014, 04:03 PM Reply Like
  • frrizzo380
    , contributor
    Comments (934) | Send Message
     
    LO has been growing at a rapid rate. It has been growing the dividend over 10% per year. Intrinsic value of LO is at least $80. LO has been the only US cigarette company that has been growing market share and volume along with owning the BLU brand. Trading the rocket ship that has been LO for the turd that is RAI is a bad deal.

     

    If this deal goes through I will be promptly selling my RAI shares and buying more MO. MO will continue to crush RAI as evident by stealing RAI's market with the Marlboro brand.

     

    I had nothing but praise for LO's management. After LO agreeing to this deal that is no longer the case.
    15 Jul 2014, 09:01 AM Reply Like
  • Sunshine123
    , contributor
    Comments (894) | Send Message
     
    I beg to disagree with comments that RAI is a turd. This company has split twice since I have owned it with the price to go up again, plus raising the dividends consistently, not to mention its growth capacity. I also own MO and PM. They are all cash cows. I will not sell them ever. And, when MJ is legal, I will be a very rich gal.
    15 Jul 2014, 09:26 AM Reply Like
  • Slick E
    , contributor
    Comments (139) | Send Message
     
    So if this deal is so bad for LO, why is RAI down big as well? Fear the deal won't go through?
    15 Jul 2014, 09:35 AM Reply Like
  • kata
    , contributor
    Comments (848) | Send Message
     
    They have to give up Blue, isn't that the reason RAI was doing this?
    15 Jul 2014, 09:55 AM Reply Like
  • Jbgoose
    , contributor
    Comments (1912) | Send Message
     
    Looking at the overall picture for five, ten, twenty years it does make sense, fairness is a different lens truly depending upon one's positions and we can't ignore political winds. With pensions and the traditional largest holders selling off and many no longer allowed to hold tobacco, vice stocks, bond issues with potential problems, the e cig technology is not a craze, very much tied into global anti smoking efforts shown effective for those kicking the habit. Truthfully e cigs are also very much in growth mode and are used for medical MJ, even allowed in many hospitals these days, no not all, but the number grows. Then think of the recent laws regarding the global legalization of female hemp plant acreage allowances for larger farming production and let's hope soon enough for US farmers. Add in the even larger opportunity of industrial hemp farms ignorantly banned in the US by congress for absolutely no reason.... These firms are shifting respective business modeling, brands finding new homes, and all are attempting to do so in alignment thinking it is still 1950, until recently. Trying before the modern world does eventually tank these firms, they are simply in change mode. Tobacco farmers in the US have already been switching crops. Years going now. Why would anyone be surprised?

     

    This deal does seem to smell like a dirty ashtray from the old frat but let's emphasize 'old' as most western world populations under 30 have it burned into their heads that tobacco is only for 'stupid, or sick, or bad people' - just ask any 8-18 year old. SO, if this deal 'stinks' then ask ... Why? And there you have it. JBG
    15 Jul 2014, 10:10 AM Reply Like
  • Jbgoose
    , contributor
    Comments (1912) | Send Message
     
    So I will reply to myself - on CNBC the CEO mentioned that the e-cigs have tripled in sales in CO, and it's not because of tobacco (my words).

     

    As to these regulatory questions many bring up, the industry got together to sell off the correct brands and assets to best avoid the regulatory scrutiny that will of course create trading opps for such traders- Best Luck.
    15 Jul 2014, 04:22 PM Reply Like
  • Listerwato
    , contributor
    Comments (6) | Send Message
     
    Rookie question. If deal on LO is valued at $68.88 then why not buy LO at low $60?
    15 Jul 2014, 11:02 AM Reply Like
  • Dennis Tikkanen
    , contributor
    Comments (132) | Send Message
     
    If US antitrust regulators block the deal, LO stock will fall, likely to where they were before merger rumors began (mid to low 50s?).
    15 Jul 2014, 11:15 AM Reply Like
  • Slick E
    , contributor
    Comments (139) | Send Message
     
    The fear is that the offer is so low that the LO stockholders reject the deal, which puts the entire merger at risk. In which case, the LO stock price probably falls even further because it had run up based on the merger.

     

    There are a couple of things that mitigate that risk, especially if you're a long-term investor, and that's why I bought a little bit more LO this morning.

     

    A lot of shareholders want LO to not sell out because they've been a great company. They're growing market share and profits faster than all the other tobacco companies and they've been great in expanding their dividend. So even in the worst case scenario, you've got a great company but you overpaid for it, so you'll probably be underwater for a while. Again, not crippling if you're a long-term investor but not optimal either.

     

    Another potential possibility (and I don't know how possible, just acknowledging its existence) is that the LO shareholders reject the offer and then RAI comes back with a better one. That scenario would be a coup for anyone buying in now.
    15 Jul 2014, 11:18 AM Reply Like
  • Listerwato
    , contributor
    Comments (6) | Send Message
     
    Should have added on my question that I would be buying with extra IRA funds.
    15 Jul 2014, 11:04 AM Reply Like
  • Listerwato
    , contributor
    Comments (6) | Send Message
     
    Many thanks for your thoughts on my Rookie question.
    15 Jul 2014, 11:41 AM Reply Like
  • Slick E
    , contributor
    Comments (139) | Send Message
     
    My pleasure. I was a rookie once, way back in 2013. :)
    15 Jul 2014, 12:14 PM Reply Like
  • maybenot
    , contributor
    Comments (5184) | Send Message
     
    Yeah, wasn't sure about this deal, so I sold LO yesterday for $66.

     

    Move on to other investments.

     

    Long MO & PM (maybe pickup BTI later)
    15 Jul 2014, 11:55 AM Reply Like
  • fatbaboon
    , contributor
    Comments (251) | Send Message
     
    I'm very disappointed in this deal, and will vote my shares against. From the point of view of Lorillard's shareholders I don't see any point in this deal. Let's go back to the $50 of last year- an independent company - and with no merger chat - we'll get to $68 within a couple of years. There's no hurry. This is a beautiful company that will make us money for years!

     

    This company is ONLY worth selling IF we get paid well. And getting 13* trailing EBITDA in today's world where interest rates are zero is just not good enough. Reynolds even said in the presentation that it was accretive from year 1! And strongly accretive in year 2! I think that makes it pretty obvious that they are paying us no merger premium. Maybe Kesslers been promised a job when Cameron retires. Who knows. But it stinks.
    15 Jul 2014, 01:09 PM Reply Like
  • Dennis Tikkanen
    , contributor
    Comments (132) | Send Message
     
    When I heard that detail in the conference call recap, I wanted to throw my e-cig across the room! ;)
    15 Jul 2014, 03:32 PM Reply Like
  • tmcooper
    , contributor
    Comments (87) | Send Message
     
    I'm more worried about the price of RAI, because the cash part of the deal is fixed already at 50.50 ,so it doesn't matter what LO drops to. The .2909 of the price of RAI is where we will loose our value in the deal.
    15 Jul 2014, 02:01 PM Reply Like
  • Slick E
    , contributor
    Comments (139) | Send Message
     
    I've got to believe that RAI is dropping on fear of the deal not going through because LO shareholders are upset.

     

    Otherwise why would RAI, which has been rising in anticipation of this very deal with expectation of paying MORE, be down big? If the deal goes through in its current state that's a big win for RAI, right?

     

    Under that theory, the RAI price would rebound significantly if the deal were approved.

     

    Someone tell me if I'm missing something here. Could it be that RAI shareholders upset with the divestiture of Blu that getting LO for less than speculated doesn't even matter? That seems unlikely, but RAI dropping like this at all seemed unlikely.
    15 Jul 2014, 02:07 PM Reply Like
  • dkostek
    , contributor
    Comments (161) | Send Message
     
    RAI would have to fall below $36 for the deal value to equal LO's current price of $60.97
    15 Jul 2014, 02:35 PM Reply Like
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