Cigarette titan Imperial Tobacco (IMT) puffs 3.87% higher to £27.62 after confirming talks with Reynolds American (RAI:NYSE) and Lorillard (LO:NYSE)Bristol-head quartered Imperial is mulling over a possible acquisition of assets and brands owned by the US number two and number three tobacco producers respectively, which are finalising a complex merger.

Web chart - Imperial - July 2014

Imperial Tobacco is the world's fourth-biggest international tobacco player whose key brands include Gauloises Blondes, West and Davidoff. The behemoth says it is in active discussions to acquire assets divested by any merger between Reynolds, whose brands include Camel and Kool, and Lorillard, whose offerings include Maverick, Old Gold and the Newport brand of menthol cigarettes.

The pair are reportedly finalising their own complex merger requiring the need for disposals to assuage antitrust concerns. Imperial Tobacco points out there's no certainty of any transaction, though reports suggest a US$7 billion deal could be in the offing which would increase Imperial's exposure to the US, one of the world's biggest-but-shrinking tobacco markets.

Jefferies analyst Martin Deboo speculates the assets in play could be the Kool, Salem, Doral and Maverick brands. In a note this morning, the sector sage writes: 'If correct, we think these brands have sales of circa $2 billion. Acquiring them would increase IMT's volume market share in the USA from circa 4% to circa 11% and increase the USA as a share of IMT's tobacco sales from circa 9% now to circa 22%.'

Though the deal would bring Imperial scale across the pond, Deboo is sceptical around the benefits of increased US exposure. He says the assets likely to be on offer 'don't feel hugely attractive to us', pointing out Kool is the distant number two in Menthol to Newport in a category facing regulatory risk, while Salem and Doral's US market share has halved in five years.

Rival British American Tobacco (BATS), which has a 42% stake in Reynolds, rises 1.24% to £35.65 as M&A excitement surrounds the tobacco sector, where the rise of e-cigarette's is one factor set to drive further consolidation. Indeed, a key takeaway from Deboo's missive is that British American Tobacco's 'apparent disinclination' to consolidate Reynolds 'keeps alive our preferred end-game of an ultimate take-out of IMT by BATS.'

These are certainly busy times for Imperial Tobacco, about to rake in €471 million proceeds through the part-disposal of its Southern European tobacco logistics business Logista via an IPO on the Spanish stock exchange.

Issue Date: 11 Jul 2014