Investment Position: we remain long Lorillard (LO), which we added as a Best Idea on February 26, 2014 with a longer term price target of $80/share.
Boosting investor spirits that a RAI-LO deal gets done is news that Imperial Tobacco may soon be flush with cash and shopping the market to increase its U.S. business.
Imperial is planning to sell 30% of its stock next month in its Madrid unit, Compania de Distribucion Integral Logista Holdings SA, which is expected to raise about $800 million for the fourth-largest global cigarette maker.
The Imperial news comes as RAI is likely shopping some of its menthol-related brands (Kool, Winston and Salem, around ~5% total market share) to divest exposure and prevent anti-trust hurdles. Currently, the main flags weighing on a RAI-LO getting done include:
- A combined RAI + LO would own ~ 67% of U.S. menthol market.
- A combined deal would rank as the biggest-ever tobacco merger. 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.
Imperial currently has around 3% market share of U.S tobacco, and may be looking to boost its U.S. exposure. In 2007 it acquired Kentucky-based Commonwealth Brands for $1.9 Billion and sells under such brands as USA Gold, Sonoma and Fortuna brands.
Below we’ve outlined our TREND duration over the intermediate term (3 month); our longer term price target of $80/share represents +30% higher than Friday’s closing price of $61.50.