RJ Reynolds Exploring Possible Bid for Lorillard

Rumors emerged Monday that Reynolds American Inc

is exploring the possibility of a deal with Lorillard

. As of now, it is unclear whether this deal would be for Reynolds to purchase, merge with or purchase a portion of Lorillard. However according to the Financial Times, Reynolds has hired Lazard investment bank to "explore the deal". Reacting to this rumor, both stocks saw a spike in price yesterday and are continuing to trade above yesterday's close. There seems to be a large amount of skepticism among analysts about the validity of this rumor. Moreover, Jefferies analyst Thilo Wrede noted the deal may face "major" anti-trust issues, and Stifel analysts have commented that it is unlikely Lorillard is worth more than $60-$62. In contrast, Wells Fargo analyst Bonnie Herzog seems to be more optimistic that this rumor will turn into an actual deal. Herzog feels if Reynolds and Lorillard were to combine, it would make an "attractive" strategic partner for British American Tabacco, which owns 42 percent of Reynolds. Furthermore, Herzog believes it is likely the FTC will approve the deal if certain brands were sold off, and that a "fair" price for the deal would be near $80, much more than that of Stifel's $60-$62 range. At $80 per share Reynolds would be paying around a 40 percent premium on the current market value. Acknowledging the magnitude of this deal, Herzog raised the question of how Reynolds would finance such a large purchase and, in turn, has provided a few alternatives including a combination of stock and available cash or possibly seeking help from British American Tobacco. As mentioned previously, Both Reynolds and Lorillard saw continued increase in price with respective gains of 5.67 percent and 3.04 percent for the day.