Camel cigarettes are manufactured by Reynolds American Inc.
Camel cigarettes are manufactured by Reynolds American Inc. (Simon Dawson/Getty)

Reynolds American Inc., maker of Pall Mall and Camel cigarettes, has agreed to buy Lorillard Inc. for $27.4 billion, including debt. If completed, the merger would create a powerful rival to the largest tobacco company in the U.S.—Altria Group Inc., the holding company of Philip Morris USA and owner of the Marlboro brand.

Reynolds American, based in Winston-Salem, N.C., is the parent company of R.J. Reynolds, the second-largest tobacco company in the country. Combined with Greensboro, N.C.-based Lorillard, it would have a market value of about $50 billion and would give Reynolds the dominant menthol cigarette brand—Lorillard’s Newport—in a tobacco industry that has been declining in the U.S. and Western Europe for years.

Newport receives 80 percent of its $7 billion in annual sales from menthol brands. The U.S. Food and Drug Administration, however, has said it may regulate menthol cigarettes more tightly because of concerns they may be more addictive, according to The New York Times. The agency curbed the sale of other tobacco flavors in 2009.

If the merger goes through, the two companies together would control 42 percent of the U.S. cigarette market. Altria Group is the industry juggernaut, with $85.3 billion market capitalization. Its Marlboro brand alone commands more than 40 percent of the cigarette market in the U.S., according to the company.

The boards of directors of both Reynolds and Lorillard have already approved the merger, the companies said. Reynolds President and CEO Susan Cameron would lead the combined company, which would be headquartered in Winston-Salem. Murray Kessler, Lorillard’s chairman, president and CEO would join Reynolds board after the closing. Reynolds said it expects the transaction to close in the first half of 2015. Talks between the two principals were initially reported in May.

Under the terms of the deal, Reynolds will pay $68.88 for each Lorillard share, a 2.5 percent premium over Lorillard’s closing price on Monday. Upon the deal’s completion, Lorillard shareholders will own 15 percent of the combined company.

The deal calls for U.K.-based British American Tobacco plc to buy additional shares of the combined company for $4.7 billion to maintain its current 42 percent stake in Reynolds. At the same time, the combined company will sell its KOOL, Salem, Winston, Maverick and blu electronic cigarette brands and other assets to U.K.-based Imperial Tobacco Group for $7.1 billion in cash and assumed debt, potentially heading off antitrust issues Reynolds and Lorillard may face with the merger.

Reynolds turned to Jones Day for Tuesday’s megadeal, while Lorillard tapped Simpson Thacher & Bartlett. Imperial Tobacco sought legal representation from Magic Circle firm Allen & Overy. Kirkland & Ellis represented Reynolds’ financial adviser Lazard and Sullivan & Cromwell advised Lorillard’s financial advisers Centerview Partners and Barclays.

The sale of Lorillard’s blu, which claims a 45 percent share of the $2.5 billion and growing U.S. e-cigarette market, surprised many analysts. Lorillard is the category leader in that market after acquiring the maker of blu cigarettes two years ago and Skycig, a British e-cigarette brand in 2013, according to The Wall Street Journal. But in 2012, the U.S. government proposed cracking down on e-cigarettes with new regulations, as noted in Lorillard’s annual financial report.

Reynolds American, the second-largest manufacturer of smokeless tobacco as owner of American Snuff Company, has its own line of e-cigarettes, which includes R.J. Reynolds Vapor Company, the maker of VUSE.

Reynolds said it would continue to foster the growth of its e-cigarette technology after the merger. “We made the determination several years ago to internally design and develop VUSE as the first digital vapor cigarette and intend to remain focused on its growth and expansion nationwide,” Cameron said in a statement. “Imperial is getting a great brand in blu eCigs and will remain a key competitor in that growing category of the industry.”

Representing Reynolds from Jones Day is a team led by mergers and acquisitions partners Randi Lesnick and Jere Thomson. Also advising were antitrust partners Joe Sims and Craig Waldman, as well as employee benefits and executive compensation partner Dan Hagen and intellectual property partner Warren Nachlis.

In 2005, Jones Day counseled R.J. Reynolds on its acquisition of Brown & Williamson Tobacco Corp., a U.S. subsidiary of British American Tobacco, in a deal worth $10 billion. (Cravath represented BAT and Brown & Williamson on that transaction.)

Simpson Thacher’s team representing Lorillard in its deal with Reynolds includes mergers and acquisition partners Derek Baird, Robert Spatt, Eric Swedenburg and Adam Signy; credit partners Stephen Short and Brian Steinhardt; regulatory partners Kevin Arquit and Matt Reilly; executive compensation and employee benefits partner David Rubinsky; tax partner Gary Mandel; and IP partner Lori Lesser.

In 2008 Simpson Thacher advised the independent board of directors of Loews Corp. as it spun off Lorillard in a deal worth $13 billion.

Handling Cravath’s work for British American Tobacco was a team led by mergers and acquisition partners Ting Chen and Philip Gelston and includes tax partner Michael Schler and antitrust partner Christine Varney. Associates on the matter include Amanda Fenster, Katherine Rocco and Wenying Zhang.

Imperial Tobacco tapped Allen & Overy, with a team led by corporate partners Jeremy Parr and Eric Shube, and assistance from antitrust partner Elaine Johnston and antitrust senior counsel David Ernst, corporate senior counsel Brian Jebb and senior associates Mark Davis and Sarah Shaw, as well as associates Jochem Beurskens, Luisa Di Lauro, Mike Maier, Natalie Montano, Desma Polydorou, Shira Selengut and Loren Thomas.

Kirkland & Ellis represents Lazard, financial adviser to Reynolds. 
On the deal were corporate partners David Feirstein and Sarkis Jebejian and associate Clement Smadja.

Sullivan & Cromwell counseled Centerview Partners and Barclays, financial advisers to Lorillard. Its team includes corporate partners Francis Aquila and Brian Hamilton, as well as associate Bernd Delahaye.

Reynolds American has made lobbying payments in the past to Alston & Bird, Locke Lord and Womble Carlyle Sandrige & Rice, the most recent of which were in 2009 and 2010.

A tally from 2010 into the third quarter of this year shows that Lorillard has paid $10.96 million to Dickstein Shapiro for lobbying work on an array of issues. The most recent filing by Dickstein for Lorillard was Friday, July 11, in which the firm issued a termination notice of its work for the company. A group of 13 lawyers and lobbyists from Dickstein are leaving for Greenberg Traurig in Washington, D.C., a big lateral move noted in a story last week by The National Law Journal.

Senior reporter Brian Baxter contributed to this story.