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LO is up nearly 3% intraday after closing up 4% yesterday (and hitting all-time highs) – we believe rumors that RAI is interested in acquiring LO are responsible for the move, however we think a hypothetical deal (especially an imminent one) is challenged:

  • Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.
  • Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.   

RAI could look to divest such menthol brands as Kool, Winston and Salem (~5% total market share), which could serve to change the consideration of the FTC/DOJ.

We’re not surprised to hear rumors that LO is a take-out target. Underling our Best Idea Long Call on Lorillard in early March 4th was the strength of its portfolio:

  • Leading share and profitability of its core menthol business,
  • Our belief in the limited menthol regulatory risk over the longer term (substantiated by a Washington, D.C. tobacco expert), and
  • Upside growth in its blu e-cigarette business that commands leading share in the U.S.

As part of the Best Idea’s thesis we did not consider a RAI + LO deal. We think the recent announcement that Susan Cameron will replace Daan Delen on May 1 could also be fueling speculation that she wants to come out of the box “strong” – which is drumming up rumors about this deal. 

There’s been no comment from either LO or RAI.  Even without consideration of a deal with RAI, we’ve outlined a scenario in which LO’s business propels the stock to $80/share over the longer term. That would be ~ 36% higher than today’s price.

Howard Penney

Managing Director

Matt Hedrick


Fred Masotta