Lorillard is a Smoking Hot Deal

Investing in tobacco companies has always yielded good dividends. Lorillard (LO, Financial) is one such company. It is known to have products for the premium as well as the popular segment. It is the third-largest manufacturer of cigarettes in the U.S.

Founded in 1760, Lorillard is the oldest continuously operating tobacco company in the U.S. Newport, Lorillard’s flagship premium cigarette brand, is the top-selling menthol and second-largest selling cigarette in the U.S. In addition to Newport, the Lorillard product line has four additional cigarette brand families marketed under the Kent, True, Maverick and Old Gold brand names. These five brands include 41 different product offerings which vary in price, taste, flavor, length and packaging. In April 2012, Lorillard acquired blu ecigs, the leading electronic cigarette company in the U.S. (Source: Company’s Website)

Second quarter earnings report

The company invested approximately $8 million to launch the blu brand in the United Kingdom during the quarter. LO repurchased 2.7 million shares during the quarter at a cost of $156 million. Cigarettes adjusted operating income (non-GAAP) increased 4.2% over last year and adjusted operating margin increased 1 percentage point. Total Lorillard retail market share of cigarettes for the second quarter of 2014 was 15.0%, increasing 0.2 share points compared to the corresponding period of 2013. Newport retail market share for the second quarter of 2014 was 12.8%, increasing 0.3 share points versus last year. Newport retail market share of menthol for the second quarter of 2014 was 37.1%, increasing 0.2 share points versus last year.

Adjusted diluted earnings per share increased $0.03, or 3.7%, to $0.84 in the second quarter of 2014 and increased $0.06, or 4.1% to $1.53 in the first half of 2014, due to the continued strong operating performance in the Cigarettes segment and the impact of share repurchases. (Source: Company’s Website)

Merger Deal with Reynolds American

Lorillard and Reynolds American (RAI, Financial) entered into a definitive agreement in which Lorillard agreed to be acquired by Reynolds in a cash-and-stock transaction. Under the terms of the transaction, which have been approved by the board of directors for both companies, Lorillard shareholders will receive, for each Lorillard share, $50.50 in cash and 0.2909 of a share in RAI stock at closing. On the day of the announcement, the transaction implied an enterprise value of $27.4 billion, representing approximately 13 times Lorillard’s 2013 EBITDA. The deal will witness the participation of the likes of British American Tobacco (BTI, Financial) and Imperial Tobacco Group (ITYBY, Financial).

In connection with the transaction, Reynolds also announced that it has reached an agreement with Imperial Tobacco Group PLC, the fourth-largest international tobacco company, under which Imperial has agreed to purchase the Kool, Salem, Winston, Maverick and blu eCigs brands and other assets and liabilities from Reynolds and Lorillard for a total consideration of $7.1 billion in cash. As part of the divestiture, Imperial will acquire certain assets owned by Lorillard, including its manufacturing and R&D facilities in Greensboro, N.C. and Danville, Va., and approximately 2,900 employees, including Lorillard’s national sales force. The acquisition of Lorillard is subject to customary closing conditions including approval by shareholders of both Reynolds and Lorillard, as well as regulatory and other approvals and other customary closing conditions. The Imperial divestiture transaction is subject to approval by Imperial shareholders, as well as regulatory and other approvals and other customary closing conditions. The companies expect the transactions to close in the first half of 2015.

Future should look like

Increasing numbers of people are quitting smoking due to the numerous health hazards posed by it. A number of cigarette companies are increasing prices to offset the decline in sales. But this is not going to help in the long run. So it may be rightly said that, given the current scenario, LO, in the near future would have to capitalize on its e-cigarettes. The company is all set to incur more for the launch of new cigarettes this year. The e-cigarettes section is probably the section that we have to look out for in the next few quarters since the company is expected to garner in more revenue from this section.

To end

“Lorillard continued to deliver industry-leading cigarette operating and market share performance in the second quarter and for the first half of 2014, while also making a significant investment to expand blu eCigs in the U.K.,” stated Murray S. Kessler, Lorillard chairman, president and CEO. “Continued strong pricing realization and tight cost controls in our Cigarettes segment allowed us to deliver solid adjusted cigarette operating income growth in the quarter and for the first half of the year. While second quarter blu eCigs’ sales were below expectations, recent new blu product launches and the introduction of the blu brand into the U.K. in the second quarter solidify blu eCigs’ position as the U.S. market leader and the world’s first truly global e-cigarette brand and will result in accelerated sales going forward.”

Tobacco companies have always been known for offering good dividends and strong balance sheets. Lorillard, of course, is no exception to that. The cigarette industry has always been put under the scanner for being unhealthy. Despite hailing from unhealthy industry, Lorillard is marching higher. It is making its international presence increasingly felt with lots of expansion plans on the cards.

LO is strategically in an advantageous position as compared to its peers. Investors looking for growth possibilities may consider this company.