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Reynolds American, Lorillard Deal May Reshape Big Tobacco: What Wall Street Thinks

Stocks in this article: MO RAI LO BTI

Updated from 9:39 a.m. EDT to include updated share prices.

NEW YORK (TheStreet) –– Reynolds American (RAI) confirmed Friday it was in talks to acquire smaller rival Lorillard (LO) following news that London-based Imperial Tobacco said it would buy certain assets and brands owned by both companies, essentially forcing the hand of the companies to admit to merger talks.

In a statement, Greensboro, N.C.-based Lorillard said, "No agreement has been reached and there can be no assurances that any transactions will result. Unless circumstances dictate otherwise, Lorillard does not intend to make any additional comments regarding this matter."

The news comes after Reuters first confirmed the talks in May, citing sources close to the negotiations.

Any deal would have to be approved by London-based British American Tobacco (BTI), since it owns 42% of Reynolds American. As part of the deal, Imperial Tobacco would potentially buy up to $7 billion worth of brands from the combined companies, who are best known for brands such as Newport (Lorillard) and Camel (Reynolds), putting pressure on Philip Morris USA, a division of Altria (MO)as the largest tobacco maker in the United States. Newport is the largest menthol cigarette brand in the U.S., while Lorillard's blu eCigs brand, is "the clear U.S. electronic cigarette category leader, achieving a 45% dollar market share," according to the company's first-quarter results.

Lorillard also noted that its total retail market share of cigarettes exceeded 15% for the first time ever, coming in at 15.2% for the first quarter.

Shares of Lorillard finished sharply higher Friday, gaining 4.6% to $66.01, while Reynolds American shares fell 0.82% to $61.75. 

Altria is set to issue second-quarter results on July 22. Analysts surveyed by Thomson Reuters expect the company to earn 66 cents a share on $4.59 billion in revenue. Altria, which owns the Marlboro brand, had 43.7% of the domestic U.S. cigarette market, and 50.6% of the overall market when including other brands in 2013, according to the company's Web site.

Tobacco stocks have performed well this year, with Altria gaining 11.9% year to date while Reynolds American and Lorillard have performed even better, largely due to the merger talks. Reynolds American shares have gained 24.5% year to date, as have shares of Lorillard.

On the back of these confirmed merger talks, here's what a few Wall Street analysts said recently about the tobacco industry, as consolidation becomes a large part of the discussion and investment thesis.

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