Reynolds American Buys Lorillard

US cigarette manufacturer Lorillard is to be bought out by global giant Reynolds American for $69 per share. Morningstar analysts have raised their fair value estimate

Philip Gorham 16 July, 2014 | 11:26AM

Cigarette manufacturer Lorillard (LO) is to be bought out by Reynolds American (RAI) for $69 per share, causing Morningstar analysts to raise their fair value estimate for Lorillard to the same price.

In connection with the deal, Imperial Tobacco (IMT) will acquire cigarette and electronic cigarette assets from the combined Reynolds-Lorillard entity for $7.1 billion. Strategically, we believe this is a sound move for Reynolds, creating a duopoly with Altria, which is good for pricing power and moats.

Although at 12 times pre-tax earnings, Reynolds has paid a full price to grab Newport, one of the crown jewels of the U.S. tobacco industry. We are maintaining our narrow moat rating for Reynolds at this time, but may consider revising it as we think this deal significantly improves Reynolds' competitive positioning.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
British American Tobacco PLC2,677.00 GBX0.15
Imperial Brands PLC1,413.00 GBX-0.49

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Philip Gorham  

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