Lorillard Inc. (NYSE: LO) had an impressive Tuesday trading session on reports that Reynolds American Inc. (NYSE: RAI) was interested in buying the company. The merger would consolidate the pure-play tobacco companies in America from three down to two. While we would consider this a rumor of sorts for now, there are some serious considerations here.

Reynolds is worth roughly $30 billion, versus about $20 billion for Lorillard. Altria Group Inc. (NYSE: MO), which is just the domestic side of the old Phillip Morris tobacco giant, is worth a whopping $73.3 billion. The real question is how the combined Reynolds-Lorillard would fare against Altria when competing for investor dollars and in selling to the public.

Altria generated $24.466 billion in 2013 revenue, with net income applicable to shareholders of $4.535 billion. Reynolds’ 2013 revenue was $8,236,000 and income applicable to shareholders of $1.718 billion. Lorillard’s 2013 revenue was $6.95 billion with income applicable to shareholders of $1.18 billion. So the combined companies, without any consideration on savings at all – would be $15.186 billion in revenue and net income of $2.898 billion — with a combined market value of close to $50 billion.

The dividends are all high, but Altria’s payout yield of 5.3% compares to 5.3% for Reynolds and 5.0% for Lorillard.

Lorillard shares closed up over 3% at $55.26 and shares hit a new high of $56.85 on the news, while Reynolds closed up 5.7% at $56.31 and it hit a new high of $56.48on the day. Even Altria rose by 1.7% to $37.07 against a recent high of $38.58.

With e-cigarettes coming on strong, traditional tobacco companies are going to have to be nimble. Perhaps that implies consolidation, but it also means that other bolt-on buyouts of e-cigarettes may be necessary. A Reynolds and Lorillard combination would likely (or conceivably) press more small bolt-on deals by Altria.

Sorry, but no reference to medical or recreational legal cannabis has been considered in this smoking merger outlook. At least not for now.

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