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Reynolds, Lorillard Confirm Merger Talks

NEW YORK (The Deal) -- Cigarette makers Reynolds American (RAI - Get Report) and Lorillard (LO) on Friday confirmed merger talks to create an entity with an equity value of roughly $56 billion after U.K. peer Imperial Tobacco Group plc blew any remaining cover by saying it was in talks with the two U.S. companies about buying unspecified assets and brands.

Lorillard, of Greensboro, N.C., said Reynolds, of Winston-Salem, N.C., would be the acquirer, ending weeks of media speculation about a tie-up between the two tobacco groups.

"In connection with that transaction, RAI and Lorillard are in discussions with Imperial Tobacco Group PLC regarding the potential sale of certain assets and brands owned by RAI and Lorillard to Imperial, " said Lorillard. "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."

Reynolds is 42%-owned by British American Tobacco plc and had a market value of $33.3 billion as of Thursday's close and brands including Pall Mall and Camel. Lorillard's equity was worth $22.8 billion. It makes Newport and Kent cigarettes.

Shares in Imperial Tobacco, the Bristol, England maker of Lambert & Butler cigarettes, were up more than 3% following its earlier announcement of talks with the U.S. companies, making it the lead gainer on the FTSE 100. Its statement included the standard disclaimer that a transaction -- and associated debt financing -- may not materialize.

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"The USA remains one of the world's largest and most profitable cigarette markets. Imperial would proceed with an acquisition only if its terms met strict transaction criteria," the company said.

Imperial Tobacco's equity is worth about 25.4 billion pounds ($43.5 billion).

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