A merger creates a new landscape in America’s tobacco industry, and perhaps also overseas
By B.U.
IT’S been a long time since tobacco companies stopped pretending their products were good for consumers and started admitting they are managed mainly to benefit shareholders. Most of the time, they do that by raising prices, paying out generous dividends and buying back their shares. Today Reynolds, America’s number two tobacco company, and Lorillard, the third-largest, took the more dramatic step of agreeing to merge. Reynolds is to pay $27.4 billion in cash and shares to form a combined company with $11 billion in sales. Its biggest shareholder, British American Tobacco, will spend $4.7 billion to maintain its 42% share in the merged firm. The transaction will reshape the American tobacco market, the world’s second-biggest by volume (after China), and could have reverberations overseas.
The biggest question about the deal is whether America’s Federal Trade Commission will approve it. You might expect antitrust regulators to take a lenient view of tobacco-market concentration. After all, who cares if oligopolists push through price increases that discourage people from smoking? In fact, the FTC views nicotine addicts as an especially vulnerable group, and is therefore likely to take a very hard look at the Reynolds-Lorillard tie-up.
That explains the presence of a fourth party to the transaction, Britain’s Imperial Tobacco. It will pick up Reynolds’s Winston cigarettes, a fading competitor to Marlboro, the American bestseller. And, in a surprise, it will acquire Lorillard’s blu, the biggest brand of e-cigarettes (most analysts had thought that blu was one of the prizes that Reynolds coveted). At a stroke, the deal will promote Imperial from being a marginal American player to a distant but credible number three, with a market share of about 10%. That will be enough, executives hope, to reassure the FTC.
The main point of the merger is to bring Lorillard’s Newport brand, a menthol-flavoured cigarette that is especially popular among black and Hispanic smokers, into Reynolds’s domain. It is the number-two American cigarette and takes in more revenue than “original” Coke. Susan Cameron, Reynolds’s chief executive, reckons that the combined company will save some $800m a year from sharing administrative costs and sales forces. It will be a more formidable competitor for tobacconists’ shelf space to Altria, Marlboro’s manufacturer. Low interest rates are another big part of the merger’s appeal. Reynolds claims that it will add to earnings per share from the first year.
The main change American smokers are likely to notice will be a tarting up of Winston, which Imperial’s boss, Alison Cooper, has more faith in than Reynolds did. She also sees “plenty of opportunity” to boost profits by raising prices. Consumers should brace for a marketing blitz for Vuse, the fledging brand on which Reynolds has now placed its e-cigarette chips.
The merger also signals a cautious lessening of America’s isolation from the rest of the global tobacco market. Reynolds and BAT plan to collaborate more closely on e-cigs and “heat-not-burn” cigarettes, which they hope will help compensate for a widespread decline in smoking of the conventional kind. In addition to stepping up its American activities Imperial plans to take blu overseas. An American merger is making tobacco more global.
