Last checked at (Sharecast News) - Shares of Imperial Brands and British American Tobacco were under pressure on Wednesday following news a day earlier that US tobacco rivals Philip Morris and Altria are in merger talks.
At 0840 BST, Imperial Brands shares were down 1.8% at 2,025p and BAT shares were 1.7% lower at 2,780p.
Broker Liberum said there is some risk that the combined Philip Morris could be a more effective competitor to BAT and Imperial Brands both in the US as well as in other key markets.
"Clearly a successful merger would crystallise the need for both companies and Japan Tobacco to seek out new ways to unlock value," it said.
"However, the old regulatory hurdles surrounding material market share overlaps in several markets persist meaning that and M&A scenario remains complicated, particularly for BAT. Therefore, we see the potential for both BAT and Imperial Brands shares to come under some pressure if it looks likely that the merger of equals proceeds without a hitch.
"However, of the two we would see Imperial as better positioned to unlock value through potential disposals or a potential break-up."
Altria and Philip Morris confirmed on Tuesday that they were in talks about a potential all-stock merger of equals, more than a decade after the two companies split off.
"There can be no assurance that any agreement or transaction will result from these discussions," they each said in a statement. Any deal would be subject to the approval of both companies' boards and shareholders, and regulators.
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