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Published on : Mar 05, 2014

U.S. tobacco giant - Reynolds American has stated a bid for its biggest rival Lorillard in the market. This bid has set quakes on the global tobacco market that is already being remodeled by declining smoking rates and growth of electronic cigarettes.  

Lorillard shares closed at 9.3 percent at $53.61 early Monday, giving a market value of $19.6bn. Reynolds bid could not be fairly determined because any market figure could ideally define the value of the company at more than $20bn. People’s familiarity towards the matter was an added point in the deal. 

Reynolds was involved with brands such as Pall Mall, Camel, and Kool cigarettes. However, RJ Reynolds the owner of the company was still unclear about the bid plan if he was to buy a part of Lorillard, seek a merger, or bid for all of it. 

Lorillard’s sales mainly came from the Newport brand of menthol cigarettes that once experienced a long-term decline in the US tobacco market. Lorillard has other brands including Kent, Old Gold, and Maverick. These brands bought the brand called as Blu in 2012 for $135m and were the first to introduce e-cigarettes too. 

The e-cigarette sales reached nearly $2bn last year which was three times higher than the 2012’s figure. There are no federal regulations governing this market, yet it has managed to stay functional despite the conflicts faced by the local rules. 

As compared to the Reynolds’ 25 percent and Altria’s 41.5 percent tobacco market sales in 2012, Lorillard controlled 11.7 percent sales of the entire North American tobacco market. 

The success of Reynolds deal would come across to be the largest in the tobacco industry for several years to come. Meanwhile, Reynolds has appointed Lazard as its investment bank to survey through the whole deal. 

In addition, British American Tobacco (BAT) that owns 42 percent of Reynolds shares – a smaller US market share would also be seen playing a major role as the UK group. 

Bonnie Herzog, an analyst at Wells Fargo Securities said the Reynolds fair price could be higher than $60. According to her market evaluations, the combination would create a great impact to Altria - their competitor and could benefit them with substantial synergies and cost savings. However, she broadly questioned about company dealings as to how Reynolds would manage its finance and it could be better off structured instead of being a merger. She also added that BAT could help finance a takeover remedy and Reynolds might want to gain a clear picture on the FDA reviews of the regulations declared on both e-cigarettes market, as well as the menthol cigarette market.