RJR TO ACQUIRE RIVAL'S U.S. OPERATIONS

$2.6 Billion Deal Gets Brown & Williamson Brands

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WASHINGTON (AdAge.com) -- R.J. Reynolds Tobacco Holdings and Brown & Williamson Tobacco are merging their U.S. operations, the tobacco makers announced yesterday.

The deal, which requires regulatory approval

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and possible asset sales, combines the second- and third-largest cigarette companies. R.J. Reynolds Tobacco Co. makes Camel, Winston, Salem and Doral brands, while B&W makes Kool, Lucky Strike and Pall Mall.

Legal liabilities
RJR will pay $2.6 billion in cash and stock and will own 58% of the new venture, Reynolds American, and will assume all legal liabilities incurred as a result of the tobacco makers' settlements with state attorneys general. British American Tobacco, which owns B&W, will oversee the tobacco brands. Reynolds American will have about $10 billion in annual sales.

RJR will also pay British American $400 million to acquire its Lane Limited, a subsidiary that manufactures several cigar, roll-your-own and pipe tobacco brands and distributes Dunhill tobacco products.

In January 2002, RJR acquired Santa Fe Natural Tobacco Co., the maker of niche cigarette Natural American Spirit, as a wholly owned subsidiary.

Philip Morris
The merger comes as tobacco makers continue to lose ground to discount brands and industry leader Philip Morris USA, which controls about half of the tobacco market. B&W controls 10.6% of the U.S. tobacco market while RJR reaches 23%.

Advertising is handled by a variety of agencies within different holding companies. B&W recently moved Pall Mall to WPP Group's Ogilvy & Mather, Chicago, while Grey Global Group's G2 handles Lucky Strike and WPP's 141 Worldwide handles Kool. Media services for B&W brands are with Media Kitchen, an arm of Kirshenbaum Bond & Partners, New York. RJR uses Mezzina/Brown & Partners, New York, for Camel.

Executive roles
The companies said Andrew J. Schindler, chairman-CEO of RJR, will serve as executive chairman of Reynolds American for a six-month period after closing and then as non-executive chairman. Susan Ivey, currently president-CEO of B&W, will serve as president-CEO of Reynolds American.

Announcements regarding the balance of the executive management team will be made at a later date.

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