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US tobacco giants in $25 billion purchase deal

– Joe Camel is bulking up to take on the Marlboro Man.

Camel cigarette maker Reynolds American Inc.’s $25 billion deal to buy Newport maker Lorillard Inc. creates a formidable No. 2 tobacco company in the U.S. behind Marlboro maker Altria.

It also creates a powerhouse in menthol cigarettes, which are becoming a bigger part of the business and gives the combined company some breathing room even as people smoke fewer cigarettes every year.

The deal announced Tuesday also creates a new major player in the country’s tobacco market, the U.K.’s Imperial Tobacco, which is buying some of the companies’ other brands including Kool and Winston and instantly becomes the king of e-cigarettes in the U.S.

The deal also is a big indication that Reynolds sees electronic cigarettes as a promising side business but not the whole future. To get the acquisition done, Reynolds is ceding a commanding lead in the e-cigarette business by selling off Lorillard’s dominant Blu e-cig brand, highly visible because of its TV commercials featuring Stephen Dorff and Jenny McCarthy, to Imperial.

Reynolds and Lorillard value the deal at $27 billion including debt. It is expected to close in the first half of 2015 but will likely face regulatory scrutiny.

Lorillard shareholders would receive $50.50 in cash for each share and 0.2909 of a share in Reynolds stock at closing, a combination valued by the companies at $68.88 a share. After the deal, company, which will remain based in Winston-Salem, North Carolina, is projected to have more than $11 billion in revenue.

To help to ease regulatory concerns about competition, Imperial Tobacco Group will buy the Kool, Salem, Winston, Maverick and Blu e-cig brands for $7.1 billion, tripling its share of the U.S. cigarette market. Imperial already owns Commonwealth-Altadis Inc. of Fort Lauderdale, Florida, maker of USA Gold cigarettes.

Reynolds will keep its Camel, Pall Mall and Natural American Spirit brands and acquire Lorillard’s flagship Newport brand, giving it 34 percent share of the U.S. retail cigarette market. Newport and Camel are two of the largest players in menthol cigarettes.

On its own, Newport accounts for 37 percent of the menthol segment.

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