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Reynolds American buys rival for $27.4 billion

Big tobacco just got bigger.

Two of the largest names in tobacco joined forces Tuesday when Reynolds American bought its smaller rival Lorillard to the tune of $27.4 billion. This move unites the No. 2 and No. 3 American cigarette companies in what appears to be a combined effort to win over the lion’s share of the shrinking smoking population.

Reynolds plans to pay $68.88 in cash and stock for each Lorillard share and assumed all of their former competitor’s debt.

Yet two separate companies are also involved in divvying up brands and assets. British American Tobacco, which currently owns 42% of Reynolds, will buy about $4.7 billion worth of new shares to keep their same level of ownership in the company.

The Bristol-based Imperial Tobacco Group has agreed to purchase Reynold’s Salem, Winston, KOOL and Lorillard’s Maverick brands in addition to the widely popular Blu e-cigarette brand. They will pay $7.1 billion and also acquire a former Lorillard manufacturing plant in North Carolina. Many speculate that Reynolds sold these brands to ease the antitrust scrutiny that the deal may face.

The deal gives Reynolds an edge over their competitors especially when it comes to the geographic diversity of the company and their stake in menthols, which is one of the fastest growing products in the industry. Newport menthol cigarettes are the countries most popular menthol and attract 40 percent of new smokers.

Blu’s divestiture surprised a number of analysts since the brand rakes in 40 percent of the American market for e-cigarettes. Yet Reynolds announced plans last month to grow the distribution of its own e-cigarette brand known as Vuse. For the moment, executives remain confident that Vuse can continue to compete with Blu.

In the end, Reynolds expects to increase their revenue to over $11 billion, with about $5 billion in operating income annually.

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