Two of the biggest American tobacco companies said Friday that they were in talks to merge – a move to cut costs and shore up profits as the number of smokers shrinks.
A deal between the second-biggest tobacco company in the United States, Reynolds American, and No. 3 Lorillard would unite the maker of the brands Camel and Newport and would create a formidable rival to industry leader Altria Group, home of Marlboro.
The complex transaction – involving not only the two companies, but also British American Tobacco and the Imperial Tobacco Group – could be announced as soon as early next week, according to people briefed on the matter.
Under the proposed terms of the deal, Reynolds American would buy Lorillard to create a company with a combined market value of more than $56 billion. It would then sell several billion dollars’ worth of brands and other assets to Imperial, raising the smaller British rival to the No. 3 position in the United States and potentially assuaging antitrust concerns.
The merger discussions represent the industry’s boldest response yet to a declining, if still profitable, market. Declining smoking rates generally and aggressive public health campaigns aimed at curbing smoking have cut into sales in the United States.
Lately, the industry has seen opportunity in the new business of e-cigarettes. E-cigarettes already have about $2.5 billion in annual sales. Though that is a tiny fraction of the overall tobacco market, e-cigarettes sales are expected to grow quickly in the coming years. A merger could give the companies sufficient scale for the technology and the promotion needed to make what is now a small niche a bigger market.
The companies on Friday did not disclose financial terms for the potential merger. The combined company would have 42 percent of the tobacco market in the United States, according to Credit Suisse research.