Why Investors Hate the Reynolds-Lorillard Merger, In 8 Simple Slides

What’s Behind Today’s Plunge?

• Yet merger talk had circulated for months, so what shocked investors so much?

Both Reynolds and Lorillard shares fell sharply today after news of the merger.

Basic Terms of the Deal Weren’t Unreasonable

• Lorillard shareholders will receive $50.50 per share in cash.

• They’ll also receive 29.09 shares of Reynolds American for every 100 Lorillard shares they own.

• Reynolds touts deal’s premium, but compares share prices from before merger talk began.

Total deal value is $27.4 billion, or $68.88 per share.

Reynolds Hopes for Big Benefits

• Better product balance, as Newport adds menthol exposure.

• Synergies will help drive R&D and innovation for new products.

• Expected to be accretive to earnings in first year after merger.

• Cost savings will help boost strong dividends in the future.

CEO Susan Cameron lists reasons favoring merger.

Reynolds CEO Susan Cameron. Source: Reynolds American.

But Huge Changes Were Unexpected

• Reynolds Americanwill keep the keyNewport brand.

• But Imperial Tobaccowill buy several ofLorillard’s other keybrands:– KOOL, Salem, Winston, and Maverick will go to Imperial.– Result: Imperial will see its U.S. market share triple.

Source: Lorillard.

The Biggest Blunder: Selling blu

• Reynolds is committed to its competing Vuse brand.

• But blu is the strongest e-cigarette brand in terms of market share and has a huge first-mover advantage over Vuse and other e-cigs.

As part of the deal, Imperial will buy blu eCigs.

Source: Lorillard.

Reynolds Will Face Big Potential Risks• Adverse FDA menthol decision could

crush Newport’s value to Reynolds.• Vuse could prove unable to catch up

to blu eCigs success.• Introduction of Imperial Tobacco as

new, bigger U.S. competitor changes dynamics of the entire industry.

• Merger doesn’t change negative trends in sales volume.

Source: Wikimedia Commons.

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