Imperial to spend £4.2bn on snapping up assets from Reynolds and Lorillard merger

Tobacco company behind Davidoff cigarettes plans to buy Winston and Kool cigarette brands to ease antitrust concerns relating to $27.4bn deal between Reynolds and Lorillard

Imperial Tobacco is hoping to benefit from a deal that will re-shape the US tobacco market
Imperial Tobacco is hoping to benefit from a deal that will re-shape the US tobacco market Credit: Photo: Getty Images

British cigarette maker Imperial Tobacco is planning to spend £4.2bn on buying up the US cigarette brands up for grabs as part of the $25bn merger between two of the world’s biggest cigarette makers, Reynolds American and Lorillard.

Imperial has arranged to sweep up the brands, which include Winston and Kool, as a move to ease antitrust concerns from the marriage of the United States' number two and number three tobacco firms.

The UK tobacco firm will also sweep up US tobacco brands Maverick, Salem and the international and US rights to the nation's leading e-cigarette brand, blu. The deal will mean that the North American market will account for 24pc of Imperial's revenues.

“The most surprising element is that Imperial is taking the e-cigarette business from Lorillard,” said Philip Gorham, an analyst at Morningstar. “It was probably the sweetener that convinced them to buy what is essentially a selection of third-tier brands.”

Imperial Tobacco’s chief executive, Alison Cooper, said that the cigarette company would not need a rights issue to fund the acquisition and it had already lined-up debt financing for the deal.

"This is a great opportunity to transform our US business and secure a significant presence in the world’s largest accessible profit pool", Ms Cooper said.

Imperial also announced that it was the former chief executive of Lorillard, Martin Orlowsky, was stepping out of retirement to join as executive chairman designate of Imperial's enlarged US business. A spokesman confirmed that Mr Orlowsky would report to Ms Cooper.

Credit rating agency Moody’s changed its outlook from stable to negative on the British company on the back of the deal, but affirmed its Baa3 rating.

Imperial said that it would suspend its share buyback programme to speed up debt repayment but would increase dividends by at least 10pc for this financial year.

Analysts at Moody’s said that while the deal posed “important long term opportunities, there are also significant execution risks, including the expectation for improvement in the Winston brand in a contracting US market for tobacco products.”

The mega-deal between Reynolds and Lorillard comes amid a slowdown in tobacco companies' sales and will mean that the US market will be left with just two competitiors who will control 90pc of the US tobacco market.

Reynolds, whose brands include Camel and Pall Mall, is paying $68.88 for each Lorillard share.

British American Tobacco, Reynolds American's largest shareholder, will buy more shares to maintain its 42pc ownership in Reynolds through a $4.7bn investment.

Analysts say the deal will help the US players compete with North America's biggest cigarette and Marlboro maker, Altria Group, in a market where sales volume is falling by around 4pc a year as more Americans quit smoking.

Lorillard shares have dropped by 7.36pc to $62.28, below the deal price, while Reynolds have also lost as much as 4.7pc to $60.20. Imperial Tobacco declined 2.9pc to 2,661p in London, while BAT fell less than 1pc to 3,561p.

“There’s a lot of risk,” said Owen Bennett, an analyst at Nomura Holdings said. “There are a lot of factors involved.”

Despite the decline, the US remains the biggest tobacco market in the world after China and the most profitable.

Investment bankers at Lazard were lead adviser to Reynolds on the deal alongside JP Morgan, Lorillard used Centerview Partners and Barclays while Imperial turned to Credit Suisse and Goldman Sachs for its part of the transaction.