Lorillard Inc. Surges Over Rumors of Merger With Reynolds

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The stock price of Lorillard Inc. (NYSE:LO) surged more than 5% to $64.28 per share at the time of this writing around 12:51 in the afternoon in New York. The increase was primarily driven by rumors that it might reach a merger agreement with Reynolds American, Inc. (NYSE:RAI).

Lorillard

“It wouldn’t surprise me if something gets announced soon. There’s no question that you have tremendous synergies and cost savings,” commented Bonnie Herzog, an analyst at Wells Fargo & Co (NYSE:WFC) yesterday.

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Since early this year, there had been speculations that Lorillard Inc. (NYSE:LO) is in talk with Reynolds American, Inc. (NYSE:RAI) regarding a potential merger.

Reynolds American, Inc. (NYSE:RAI) explored the possibility of acquiring Lorillard Inc. (NYSE:LO) for several months, but its initiatives were hindered by the complexity of a potential agreement, according to Bloomberg based on information from people familiar with the situation.

Lorillard-Reynolds could be the biggest tobacco merger

Data compiled by Bloomberg showed that combining the businesses of Lorillard Inc (NYSE:LO) and Reynolds American, Inc. (NYSE:RAI) could be the biggest merger in the history of the tobacco industry. The combined company is expected to achieve more than $13 billion in annual sales, Altria Group Inc (NYSE:MO) with nearly $18 billion in annual sales.

Francis Alexander, a fund manager at Alexander Capital Management opined that the plan of Imperial Tobacco Group PLC (ADR) (OTCMKTS:ITYBY) (LON:IMT) to sell as much as 30% of its stake in Compania de Distribucion Integral Logista Holdings SA could help forward the Lorillard-Reynolds merger discussions.

According to Alexander, the sale of its stake in the Madrid unit puts Imperial Tobacco Group PLC (ADR) (OTCMKTS:ITYBY) (LON:IMT) in a better position to acquire the assets that may be sold by Lorillard Inc. (NYSE:LO) and Reynolds American, Inc. (NYSE:RAI) to reach a merger agreement. He said, “That may be the catalyst that could allow the two to merge.”

Lorillard-Reynolds merger may not happen

On the other hand, David Hayes, an analyst at Nomura International PLC suggested a merger agreement may not happen. In a note to investors last month, Hayes suggested that Reynolds American, Inc. (NYSE:RAI) may agree to manufacture the products of Lorillard Inc. (NYSE:LO) at its plants to increase efficiency and reduce cost.

Hayes said, “Perhaps their aim is not a full merger, but simply extended cooperation to boost efficiency.”

Lorillard’s stock performance

The stock price of Lorillard Inc. (NYSE:LO) climbed from $41.56 to $65.39 per share over the past 52-week range. The shares of the company gained more than 22% year-to-date. The company is trading 20 times profit, which is almost 50% higher than last year.