AAA  Jul. 11, 2014 7:27 AM ET
Tobacco firms Reynolds, Lorillard in merger talks
By MICHAEL FELBERBAUM, AP Tobacco Writer THE ASSOCIATED PRESS STATEMENT OF NEWS VALUES AND PRINCIPLES 
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FILE - In this photo April 20, 2011, file photo, Camel brand filters cigarettes from Reynolds American Inc., are displayed at a tobacco product store in Cranberry, Pa. Cigarette makers Reynolds American Inc. and Lorillard Inc. say they are in talks of a possible merger that would combine two of the nation’s biggest tobacco companies. (AP Photo/Keith Srakocic, File)

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(AP) — Cigarette makers Reynolds American Inc. and Lorillard Inc. on Friday said they are in talks of a possible merger that would combine two of the nation's biggest tobacco companies.

The announcement follows media reports over the past few months about the possible combination that would create a formidable No. 2 to rival Altria Group Inc., owner of Philip Morris USA.

In separate statements, the companies said no agreement has been reached and there's no assurance that one will be.

Through its subsidiaries, Reynolds markets Camel, Pall Mall and Natural American Spirit cigarettes, as well as Grizzly and Kodiak smokeless tobacco brands. Its retail share of the cigarette market hovers around 27 percent. Reynolds, based in Winston-Salem, North Carolina, also expanded its Vuse brand electronic cigarette nationally last month.

Lorillard, the oldest continuously operating U.S. tobacco company, was spun off from Loews Corp. in 2008. The Greensboro, North Carolina-based company has about a 15 percent retail market share, bolstered by its flagship Newport cigarette brand, which holds a 37.5 percent share of the menthol cigarette market. As the first of the major tobacco companies to jump into the fast-growing electronic cigarette business, Lorillard acquired the Blu e-cigarette brand in 2012, and Blu now accounts for almost half of all e-cigarettes sold.

The combined company would challenge Richmond, Virginia-based Altria, which holds more than 50 percent of the retail cigarette market, led by its top-selling Marlboro brand. It also sells Black & Mild cigars, Copenhagen and Skoal smokeless tobacco and is expanding MarkTen e-cigarette brand nationally.

In a note to investors late Thursday, Wells Fargo Securities analyst Bonnie Herzog wrote that the merger would be "very positive for the global tobacco industry and could be just the beginning of future transactions."

Any deal would include involvement from British American Tobacco PLC, which makes Kent and Dunhill cigarettes overseas. British American Tobacco owns a 42 percent stake in Reynolds and a 10-year moratorium on the company increasing that stake expires at the end of July. Reynolds said Friday that British American Tobacco is involved in the merger discussions and expects to support the deal and maintain its existing stake in the company.

Also on Friday, Imperial Tobacco Group PLC said it was in talks to buy some of Reynolds and Lorillard brands should a merger occur.

The U.S. "remains one of the world's largest and most profitable cigarette markets," noted Imperial, which owns Bowling Green, Kentucky-based Commonwealth Brands Inc., maker of USA Gold cigarettes.

Herzog also noted that Imperial's involvement in the potential deal could help to stem any potential Federal Trade Commission anti-trust concerns by buying up several of the companies' smaller brands.

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Michael Felberbaum can be reached at http://www.twitter.com/MLFelberbaum.

Associated Press
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