By Olivia Oran and Soyoung Kim
NEW YORK (Reuters) - Reynolds American Inc
The proposed deal, which is late stages of talks, would combine the second- and third-largest U.S. tobacco companies, putting brands such as Reynolds' Camel and Lorillard's Newport under one roof.
The companies are working to finalize an agreement in as soon as a matter of weeks but the talks could take longer given the complex structure, the people said, asking not to be named because the matter is not public.
Reynolds, in which British American Tobacco (BAT) has a 42 percent stake, has a market capitalization of $31 billion, while Lorillard has a market capitalization of $21 billion.
Because Reynolds plans to use its own stock to pay for part of the Lorillard deal, BAT's holding in Reynolds would decrease if the merger goes through.
One option is for BAT to help finance Reynolds' bid so it would keep its ownership in the combined company at current levels, one person said. BAT's involvement could also take different forms, another person added.
Reynolds, Lorillard and BAT are working with financial advisers on the proposed deal and talks have been underway for months, the people said, cautioning that there are many moving pieces and discussions could still fall apart.
All the people asked not to be named because they were not authorized to speak with the media. Representatives for Reynolds and BAT declined to comment. Lorillard could not be immediately reached for comment.
A merger between Reynolds and Lorillard would create a formidable rival to Marlboro cigarette maker Altria Group Inc
Reynolds and Lorillard have a market share of 27 percent and 15 percent, respectively, and the proposed combination would face substantial antitrust issues.
The companies are hammering out details of potential divestitures in order to address the regulatory concern, according to the people familiar with the matter.
Buying Lorillard would catapult Reynolds' position in the fast-growing electronic cigarettes market at a time when U.S. tobacco companies are grappling with declining sales due to government regulation. Lorillard's blu product is the leading e-cigarette brand, with a U.S. market share of around 50 percent.
But the possibility of such a tie-up has also raised some eyebrows from analysts as the Food and Drug Administration has said it is considering restricting or banning menthol cigarettes, which make up the majority of Lorillard's sales.
The percentage of adult smokers in the United States fell to 19 percent in 2011 from 22.8 percent 10 years earlier, according to the Center for Disease Control and Prevention.
Merger speculation involving tobacco companies has increased after the Financial Times said in March that Reynolds was exploring a bid for Lorillard. The Times of London separately reported this month BAT is exploring possible deals for either Reynolds or Lorillard.
(Reporting by Olivia Oran and Soyoung Kim, additional reporting by Martinne Geller; Editing by Tom Brown and Meredith Mazzilli)
