text: Reynolds American Inc. agreed to acquire Lorillard Inc. in an ambitious and risky $25 billion deal that would reshape the landscape of U.S. tobacco and make Newport menthols an even more formidable rival to Altria Group Inc.'s top-selling Marlboro. 
   
   The transaction would add Lorillard's Newport, the No. 2 U.S. cigarette brand, to Reynolds's portfolio, which includes Camel and Pall Mall cigarettes, giving Reynolds a commanding... ||||| Reynolds American Inc. (RAI) agreed to buy rival Lorillard Inc. (LO) for about $25 billion excluding debt, a deal that would leave the 400-year-old U.S. tobacco industry with two competitors controlling 90 percent of the market. 
   
   Reynolds, the maker of Camel and Pall Mall cigarettes, will pay cash and stock valuing Lorillard at $68.88 a share, according to a statement. British American Tobacco Plc (BATS) will fund $4.7 billion of the transaction, letting it maintain a 42 percent stake in Reynolds. BAT’s U.K. rival Imperial Tobacco Group Plc (IMT) will acquire brands such as Kool and Blu e-cigarettes for $7.1 billion in a bid to assuage antitrust concerns. 
   
   Modernized Cigarette Seeks Respectability 
   
   Decades of anti-tobacco health campaigns have hurt demand and put pressure on the industry to consolidate. Acquiring Lorillard, the U.S. industry’s third-largest competitor, would help Reynolds cope with the slowdown and give it the Newport menthol line, which is popular in urban areas. Still, the deal faces challenges, and investors signaled that they’re uncertain it will close in its current form. Lorillard shares slid to $60.17 in New York, 13 percent below the purchase price. 
   
   “There’s a lot of risk,” said Owen Bennett, an analyst at Nomura Holdings Inc. in London. “There are a lot of factors involved.” 
   
   Photographer: Luke Sharrett/Bloomberg Lorillard Inc. brand Newport cigarettes aa a store in Shelbyville, Kentucky. Close Lorillard Inc. brand Newport cigarettes aa a store in Shelbyville, Kentucky. Close Open Photographer: Luke Sharrett/Bloomberg Lorillard Inc. brand Newport cigarettes aa a store in Shelbyville, Kentucky. 
   
   Including debt, the purchase is valued at $27.4 billion. The new company will have annual revenue of more than $11 billion -- almost two-thirds the yearly sales of U.S. market leader Altria (MO) Group Inc. -- and operating income of about $5 billion. 
   
   Market Share 
   
   Reynolds shares also fell, dropping 6.9 percent to $58.84. Imperial Tobacco declined 3.7 percent to 2,638 pence in London, while BAT fell 1.8 percent to 3,532 pence. Altria dropped 3.7 percent to $41.76. 
   
   Reynolds said the combined company will account for almost 33 percent of the U.S. industry. That leaves the U.S. with two competitors -- Reynolds and Altria -- selling nine out of every 10 cigarettes. Imperial said its market share will more than triple to 9.5 percent from 2.5 percent. 
   
   The companies will fight for customers in an industry where health concerns and smoking restrictions have eroded sales. Total U.S. cigarette shipments fell by a median of 2.9 percent in the first quarter among the nation’s top tobacco companies, according to data compiled by Bloomberg Industries. 
   
   Yet even amid the slump, the companies have remained profitable, with Altria, Reynolds and Lorillard all boosting net income last year. 
   
   Lorillard Drops 
   
   The deal -- which followed months of intermittent talks -- will have to pass antitrust hurdles. As part of the effort to overcome those challenges, Imperial will acquire well-known brands such as Salem, Winston and Maverick. Getting the Blu lineup also gives Imperial a foothold in the emerging market for e-cigarettes -- battery-powered devices that can deliver nicotine and other substances through vapor. 
   
   “The most surprising element is that Imperial is taking the e-cigarette business from Lorillard,” said Philip Gorham, an analyst at Morningstar Inc. in Amsterdam. “It was probably the sweetener that convinced them to buy what is essentially a selection of third-tier brands.” 
   
   Including the Blu brand in the deal was needed to get Imperial to the table and reduced antitrust concerns from having the products in the same company as Reynolds’s Vuse e-cigarettes, said a person familiar with the matter. 
   
   E-Cig Sales 
   
   U.S. e-cig sales were forecast by Euromonitor International to triple last year to $1.5 billion and then double annually through 2018. Still, the products face uncertainty as the U.S. Food and Drug Administration explores how to regulate them while cities and employers debate where they can be used. 
   
   Reynolds is “absolutely confident” in the future of its Vuse e-cig brand, Chief Executive Officer Susan Cameron said today in an interview. 
   
   Reynolds said cost savings from the deal will be about $800 million and that it will add to earnings in the first year. Cameron will continue as CEO of Reynolds after the acquisition, and the company will remain headquartered in Winston-Salem, North Carolina. Murray Kessler, chairman, president and CEO of Greensboro, North Carolina-based Lorillard, will join Reynolds’s board. 
   
   Reynolds and BAT also agreed to share next-generation tobacco technology, including heat-not-burn cigarettes and vapor products. Imperial will acquire Lorillard’s manufacturing and research facilities in Greensboro and about 2,900 employees, including a national sales force. 
   
   Newport Brand 
   
   Lorillard’s biggest product, Newport, will give Reynolds fresh ammunition against Altria, whose brands account for more than half of the U.S. retail cigarette industry. Altria’s Marlboro by itself has market share in the U.S. of about 44 percent, according to the company’s website. 
   
   Newport is the second-most-popular brand among all U.S. cigarettes and the leader among menthol smokes, which account for about a third of the $90 billion U.S. cigarette market. The brand was the main selling point for Reynolds, and recent signals that the FDA won’t institute overly onerous regulations on menthols gave the company confidence to move ahead with the purchase, said a person familiar with the situation. 
   
   Lazard served as lead financial adviser to Reynolds, which also consulted with JPMorgan Chase & Co., while Centerview Partners and Barclays Plc advised Lorillard. Jones Day LP provided legal counsel to Reynolds, while Simpson Thacher & Bartlett LLP served as Lorillard’s legal adviser. 
   
   Imperial Tobacco, which said it will fund its portion of the transaction entirely through debt, is being advised by Credit Suisse Group AG and Goldman Sachs Group Inc. 
   
   Months Talking 
   
   Reynolds, Lorillard and London-based BAT have been in talks since last fall to reach an agreement that would satisfy all three parties, people familiar with the matter have said. 
   
   Those discussions got a boost when Cameron returned as Reynolds’s CEO in May, Kessler said in an interview. 
   
   She was instrumental “in getting this transaction from what was sort of out there and theoretical to a very compelling transaction that our board could support,” Kessler said. “She was extremely helpful in bringing that home.” 
   
   The companies made a tentative deadline of July to reach a deal because of an agreement by BAT not to raise its stake in Reynolds without the approval of Reynolds’s board until this month, people familiar have said. 
   
   BAT’s agreement keeping it from increasing its stake in Reynolds dates back to the merger of R.J. Reynolds Tobacco Holdings Inc. with Brown & Williamson Tobacco. 
   
   Hard Look 
   
   The Federal Trade Commission is likely to take a hard look at the latest proposed transaction, according to David Balto, a Washington attorney and former policy director for the FTC who litigated BAT’s merger with Reynolds in 2004. 
   
   The FTC allowed that deal to go through because Brown & Williamson was losing market share and Lorillard was still a viable competitor, according to the FTC. The market is more consolidated now, and this deal will face serious scrutiny, Balto said. 
   
   Selling off the minor brands to Imperial, and even unloading a bigger name like Camel, may not be enough, he said. 
   
   “I wouldn’t put any number on the likelihood of this deal being approved,” Balto said in an interview. “I think it would need to be more substantial than Camel.” 
   
   To contact the reporters on this story: Duane D. Stanford in Atlanta at dstanford2@bloomberg.net; David Welch in New York at dwelch12@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net 
   
   To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net; Mohammed Hadi at mhadi1@bloomberg.net Kevin Orland
target: – Reynolds American, the maker of Camel and Pall Mall cigarettes, has agreed to buy Lorillard, the maker of Newport menthols, in a deal that will make it a strong second to Marlboro manufacturer Altria in the US tobacco market, the Wall Street Journal reports. Reynolds will pay a combination of cash and stock amounting to about $27.4 billion. It will also sell off its Kool, Salem, Winston, Maverick, and Blu eCigs brands to Imperial Tobacco Group for $7.1 billion, in the hopes of easing antitrust concerns—though analysts say regulators will be taking a hard look at the deal anyway. Altria controls about half of the US cigarette market, while Reynolds and Lorillard controlled 25% and 15%, respectively, before the tie-up. "It’s transformative because it creates a duopoly in the US," one analyst tells Bloomberg, which will help dull the pain of a longstanding downward sales trend. The deal also serves to boost Reynolds' presence in tobacco's fastest-growing product categories, menthols and e-cigarettes, the New York Times points out.