Two large tobacco companies talking merger

RICHMOND, Va. – Big Tobacco may soon get smaller.

The makers of Camel and Newport cigarettes said Friday they are in talks to combine two of the nation’s oldest and biggest tobacco companies. A deal between Reynolds American Inc. and Lorillard Inc. would create a formidable No. 2 to rival Altria Group Inc., owner of Philip Morris USA. It also could spur a wave of consolidation in the tobacco business, shrink factories and workforces, and push prices for cigarettes higher even as smokers buy fewer of them.

In separate statements, the companies said no agreement has been reached and there’s no guarantee one will be.

The merger would be “very positive for the global tobacco industry and could be just the beginning of future transactions,” Wells Fargo Securities analyst Bonnie Herzog wrote in an investor note.

That’s partly because demand for traditional cigarettes is falling in the face of tax increases, smoking bans, health concerns and social stigma. U.S. cigarette sales fell about 2.6 percent last year to 285 billion cigarettes, according to market researcher Euromonitor International.

But raising prices and cutting business costs has kept the industry handsomely and reliably profitable. The companies also have cut costs to keep profits up, and the larger scale of a combined company could make future cost-cutting easier.

“If you take a look back historically, the way to drive margins in the U.S. tobacco industry has been through consolidation,” Cowen analyst Vivien Azer said in an interview with the Associated Press, adding that the improvement in profitability would come from cost-cutting in the near term and manufacturing consolidations down the road.

Reynolds has about 27 percent of the U.S. retail cigarette market. Lorillard has about 15 percent of the retail market.