Tobacco products manufacturer Reynolds American, Inc. (NYSE:RAI) released a statement on Friday, July 11th, confirming that they were in advanced discussions to acquire Lorillard Inc. (NYSE:LO) and that 42% stakeholder British American Tobacco PLC (ADR) (NYSEMKT:BTI) (LON:BATS) is supportive of the transaction.

Reynolds American

The statement went on to say the possible acquisition is “consistent with Reynolds American, Inc. (NYSE:RAI)’s strategy of considering a variety of options to enhance shareholder value.”

Lorillard Inc. (NYSE:LO) confirmed the ongoing negotiations, and its shares were up almost 5% in premarket trading in the U.S. Friday.

Complicated deal and British American Tobacco has veto

The purported deal is complicated by the size of the transaction and the fact that several companies are involved. In its statement, Reynolds American, Inc. (NYSE:RAI) emphasized there is no guarantee a deal will get done. North Carolina-based Lorillard Inc. (NYSE:LO) has a market cap of around $23 billion.

Sources say the long-negotiated, complex deal would see London-based Imperial Tobacco Group PLC (ADR) (OTCMKTS:ITYBY) (LON:IMT) purchasing some brands from Reynolds American and Lorillard to mitigate antitrust concerns that the U.S. government may bring up. Imperial has supposedly built up a $7 billion war chest for its part in the deal. Imperial also confirmed that there were ongoing negotiations with the U.S. cigarette makers.

Last but not least, British American Tobacco PLC (ADR) (NYSEMKT:BTI) (LON:BATS) must sign off on any merger or other significant M&A move by Reynolds American, Inc. (NYSE:RAI). The sources also said an agreement could be announced by July 14.

Analyst statement

“This confirms what we’ve known, that the U.S. cigarette industry is heating up,” Chris Wickham, an analyst at Oriel Securities in London, said in a phone interview. “This is the first stage for some big battle lines that are being drawn.”

Lorillard’s – Reynolds American merger: Major implications for tobacco industry

If an agreement can be finalized, Lorillard Inc. (NYSE:LO)’s best-selling brand, Newport, would come together with Camel as the merged firm tries to compete with market leader Altria Group Inc., whose brands currently account for more than 50% of the American cigarette market. Altria Group Inc (NYSE:MO)’s dominant brand Marlboro alone enjoys a 44% market share in the U.S.

Bloomberg reports that a merger between Reynolds American, Inc. (NYSE:RAI) and Lorillard Inc. (NYSE:LO) would create a business with a market value of around $56 billion and annual sales of over $13 billion.