Analyst: Chances High of RAI Acquiring Lorillard

NEW YORK -- Nearly two months after reports surfaced that Reynolds American Inc. (RAI) is eyeing Lorillard Inc., one analyst has upped the probability of a deal.

In a new research note released today, Bonnie Herzog, managing director of tobacco, beverage and consumer research at Wells Fargo Securities LLC, said RAI "has an appetite for acquisitions" and the Winston-Salem, N.C.-based tobacco company is always looking for an attractive asset or technology that it could acquire at the right price.

Herzog believes there's an 80-percent probability that RAI, the second-largest tobacco company in the United States, could acquire Greensboro, N.C.-based Lorillard, the third-largest U.S. tobacco company, paying up to $80 per share and incorporating synergies and cost savings of around $400 million.

"We believe a Lorillard-RAI merger would result in increased scale, [an] enhanced competitive position, greater retail leverage and help to maintain a rational competitive environment," she said.

Herzog's comments came after attending a dinner in New York on Monday night hosted by RAI and its incoming President and CEO Susan Cameron.

If an agreement were to be reached between Lorillard and RAI, the Federal Trade Commission could approve the combination, taking cues from the beer industry. However, it is likely some brands would need to be divested, according to the research note.

In Wells Fargo Securities' view, a combined company would make a strategic partnership even more compelling for multinational tobacco company British American Tobacco (BAT) and "is a win-win for all parties to market/sell e-vapor products globally," she added.

Herzog also noted that Wells Fargo Securities continues to be impressed with RAI's ability to "operationalize" innovation and believes this strategy will be brought into even sharper focus under Cameron's leadership.

"We are encouraged by Susan Cameron's return as CEO as we believe it positions RAI for its next generation of success, reinvigorating its growth trajectory and setting a stronger stage for a potential combination with Lorillard and possible global e-vapor expansion with a BAT partnership," she said.