According to some sources, Reynolds American Inc. and Lorillard Inc. are in advanced talks to combine in a deal that would seriously transform the U.S. tobacco scenery, creating a powerful group right behind Altria Group Inc., the industry leader.
Reynolds American, Inc. is the second-largest tobacco company in the United States. Its holdings include R. J. Reynolds Tobacco Company, American Snuff Company, Santa Fe Natural Tobacco Company and Niconovum AB. In 2010, Reynolds American's operating companies sold about 28% of all cigarettes sold in the U.S.
Lorillard Tobacco Company is an American tobacco company marketing cigarettes under the brand names Newport, Maverick, Old Gold, Kent, True, Satin and Max.
When Lorillard bought the ‘Blu eCigs’ brand two in 2012, the e-cigarette had only a 10 percent share of the tiny U.S. market, generating about $50 million in sales. It was available in only 12,000 retail outlets and over the Internet. Nowadays, due to an aggressive marketing campaign (including frequent TV commercials and concert sponsorships) and taking advantage of Lorillard’s distribution muscle, Blu is present in 149,000 outlets and has a market share of around 47 percent. Annual sales have quadrupled to more than $200 million.
The exponential growth means that both Lorillard products ‘Blu’ and British ‘SKYCIG e-cigarette’ may be the assets with the largest potential for Reynolds American Inc. in its talks over a deal to acquire its U.S. rival. Reynolds has been slower to plunge into ecigs, which could top $2 billion in U.S. sales this year. The company plans to begin a national rollout of its ‘Vuse e-cigarette’ next month, after launching the product in Colorado and Utah in the past few months.
‘Acquisition of Lorillard would give Reynolds a distinct advantage in the e-cig market,’ said Steve Marascia, Director of Research at Capitol Securities Management. In addition, the profits in e-cigarette sales may have only just begun, with some Wall Street analysts’ predictions that e-cigarettes and other ‘vapor products’ will overtake traditional tobacco sales within six years.
Taking the lead position in e-cigarettes is appealing but given the market’s nascent nature, it is not a sure bet, as the FDA is ready to impose some regulations on these devices, that would ban sale of e-cigs to anyone under 18 and require companies to list ingredients.
Still, there are multiple arguments against this merger. For example, Reynolds and Lorillard have roughly a 25% and 15% share of the US tobacco market, which means that Altria and a combined Reynolds/Lorillard will control 90% of the cigarette market, a transaction that is sure to attract the attention of the Federal Trade Commission.
Overall, the deal is likely to be burdened with complications and it will be no simple acquisition. There are many hurdles to overcome before a deal is finalized and investors shouldn't get their hopes up just yet.