Lorillard Doesn’t Need Merger to Reward Investors

by Jenny Novac on January 27, 2012

Lorillard Inc., the subject of takeover speculation for more than three years, doesn’t need to combine with another tobacco producer to reward shareholders, Chief Executive Officer Murray Kessler said.


Lorillard Tobacco Company

“It would be a high hurdle for somebody to come in” and acquire Lorillard, Kessler, 52, said yesterday in a telephone interview from the company’s headquarters in Greensboro, North Carolina. “We can deliver a double-digit shareholder return over the long term. Lorillard can continue to run as an independent company and create tremendous value.”

The spinoff of Lorillard from Loews Corp. in June 2008 prompted speculation by analysts that the third-largest U.S. tobacco company may draw takeover bids amid shrinking cigarette demand. Lorillard’s Newport brand, the top-selling U.S. menthol cigarette, is boosting sales, making it attractive once the U.S. Food and Drug Administration decides how to regulate the minty flavoring, Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, said in an interview yesterday.

“We still believe Lorillard remains a likely candidate for consolidation once the issue of the use of menthol is resolved,” Ann Gurkin, an analyst at Davenport & Co. in Richmond, Virginia, wrote in a note to clients Jan. 19. She rates Lorillard as “neutral.”

Possible bidders include Toyko-based Japan Tobacco Inc., the U.K.’s Imperial Tobacco Group Plc and Reynolds American Inc., the second-biggest U.S. tobacco maker, Russo said.

‘Brand Presence’

Newport 100's

Newport 100's cigarettes

“Newport gives them commanding brand presence,” Russo said. “There’s potential for an acquirer to expand that brand into non-menthol cigarettes and smokeless tobacco.”

Russo manages more than $4 billion including shares of Philip Morris International Inc., British American Tobacco Plc and Altria Group Inc.

Lorillard fell 2.7 percent to $111.38 at the close in New York.

Japan Tobacco doesn’t comment on speculation, Yoshinori Tsuchiya, a company spokesman, said today by e-mail. Imperial, based in Bristol, England, said it’s “interested in potential value-creating acquisition opportunities worldwide” while declining to comment on Lorillard speculation, Simon Evans, a company spokesman, said by e-mail. Maura Payne, a spokeswoman for Winston-Salem, North Carolina-based Reynolds, also declined to comment.

Declining Shipments

Lorillard shareholders will keep receiving “double-digit returns,” Kessler said, after shares advanced 39 percent last year. Philip Morris, based in New York, rose 34 percent in 2011, while Reynolds increased 27 percent and Richmond, Virginia-based Altria gained 20 percent.

Lorillard bucked the industry trend of declining cigarette shipments in the fourth quarter, Bonnie Herzog, an analyst at Wells Fargo Securities in New York, said today in a note. The company recorded “low-to-single digit volume growth” while Altria and Reynolds shipments fell.

“Volume stability along with pricing power has delivered great returns,” said Kessler, who took charge as CEO in September 2010 after running UST Inc., the largest U.S. snuff producer.

“We have lots of opportunities for reaching out and growing” after Lorillard introduced a non-menthol version of Newport in 2010, he said.

The Newport brand accounted for about 90 percent of Lorillard’s sales revenue for the fiscal year ended Dec. 31, 2010.

Lorillard is scheduled to report fourth-quarter results Feb. 9.

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