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Sometimes a cigar is more than a cigar

Though Sigmund Freud said "sometimes a cigar is just a cigar," maybe sometimes a cigar could be deal inspiration?

A desire to grab a piece of the growing cigar industry could prompt Reynolds American Inc. to acquire Swisher International Inc., a private tobacco company and leader in machine-made cigars, Citi Investment Research analyst Bonnie Herzog said in a research report.

"We assign a 75 percent probability that the deal could happen within the next 6-12 months," Herzog said in a research report. Citi analysts conducted a survey of their industry trade contacts to gauge their thoughts and found that 88 percent of respondents believed that Reynolds would be the next major tobacco company to enter the cigar sector, and 73 percent viewed a deal between Reynolds and Swisher as the next likely deal in the U.S. tobacco market.

Herzog estimated that Reynolds could pay as much as $4.2 billion to $4.8 billion for Swisher, based on the multiple of 6-times sales that Altria Group Inc. recently agreed to pay for cigar maker John Middleton Inc. Herzog estimated that Swisher generates about $700 million to $800 million in annual revenues. Altria announced the $2.9 billion deal for Middleton last month.

"An acquisition of Swisher, a private tobacco company and a market leader in machine made cigars, would offer several benefits to Reynolds including: (1) a quick market share grab of the growing cigar industry, (2) substantial cost savings and synergies with Conwood and Lane, (3) an opportunity to truly become a "total" tobacco company, and (4) to become a bigger player in the growing U.S. cigar category than PM USA (Philip Morris USA)," Herzog said in the report.

"Should Reynolds acquire Swisher, we would view this as a positive (obviously depending on the price tag). However, historically large scale acquisitions tend to drag down the acquirers stock, at least initially, so we are waiting on the sidelines for now," Herzog said.

Reynolds declined to comment. Swisher could not be immediately reached for comment.

Wednesday, December 19, 2007

Source: Reuters.com, DealZone

Sometimes a cigar is more than a cigar