Reynolds and Lorillard Look to Merge

One of my former Buy List stocks, Reynolds American ($RAI), is looking at a major merger with Lorillard ($LO). No deal has come forth yet, but both companies seem to be seriously interested. There’s been talk about some sort of deal for a long time, but now, it’s getting serious. I think we can expect some news by the end of the month.

Tobacco has been a great sector for investors and both stocks have done very well over the last several years. There are a lot of hurdles to a potential RAI-LO deal (legal, anti-trust, divestitures, etc.) Right now, the tobacco industry is very profitable. They’re not exactly monopolies, but some of the dynamics are the same. RAI pays a big fat dividend of 4.3%.

Overall, I’m not a big fan of deals like this. I think both companies would rather not do this deal. Mergers done out of fear are often bad omens. My other concern is that after years of above-market gains, these stocks are no longer the bargains they used to be.

Posted by Eddy Elfenbein on July 8th, 2014 at 2:23 pm

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