Reynolds-BAT partnership could bring Vuse to world markets

The chief executive of U.S. tobacco firm Reynolds American has strongly hinted that it will take its Vuse e-cigarette brand to international markets through a partnership with British American Tobacco (BAT).

Reynolds, which yesterday confirmed it is to acquire rival Lorillard in a long-awaited deal worth nearly $30bn, has thus far been outshone in the U.S. e-cig sector by Lorillard’s Blu. Vuse has only just started national distribution, while Blu has captured more than 40% of the market.

But as part of the agreement for Reynolds to acquire Lorillard, the latter is now selling Blu to Britain’s Imperial Tobacco, along with a number of conventional cigarette brands. That leaves the combined Reynolds-Lorillard with the cigalike Vuse as its only e-cigarette.

It now appears that Reynolds plans to exploit its relationship with BAT, the long-time holder of a large minority shareholding in the company, to take Vuse to international markets – where it could quickly become a direct competitor for Blu in territories such as the UK, as well as the U.S. BAT operates in nearly every country and claims to be the world’s most global tobacco company.

The pair are also to collaborate on developing other alternative technologies such as heat-not-burn.

Susan Cameron, Reynolds’ CEO, said the “technology-sharing agreement with British American Tobacco…holds great potential for new avenues of growth for Vuse globally down the road”, adding that she is “very bullish about the combination of the R&D resources of both [entities] and the geographic and revenue-generating opportunities”.

Gimme

Discussing why the market leader Blu had been abandoned to a competitor as part of the Lorillard takeover arrangements, Cameron implied that Imperial Tobacco had been keen to include Blu as a condition of participating. “It was important to Imperial as part of this divestiture package and ensuring that they were a strong number three player” in the U.S. market, she said.

The agreement of Imperial was likely necessary to head off anti-trust concerns, since the combination of Reynolds and Lorillard brings together the second and third biggest U.S. tobacco suppliers to form a much closer competitor for market leader Altria. Creating a credible new third force in Imperial would dispel worries that that might excessively concentrate power in the tobacco industry.

For now, said Cameron, “we are well underway with our national expansion [of Vuse sales]. We have just expanded to 15,000 additional outlets and we are on our way to full national distribution”.

“We are very confident that Vuse can continue to compete with Blu,” she said.

And then there were three?

Meanwhile, there has been speculation that this week’s takeover could be a prelude to BAT itself buying the combined Reynolds-Lorillard.

BAT has held a 42% stake in Reynolds since 2004, when Reynolds American was created through the merger of R.J. Reynolds Tobacco Company with BAT’s Brown & Williamson. It will continue to hold that stake in the newly enlarged Reynolds, by topping up its investment – and will at the end of this month be released from a ten-year “standstill” provision that prevented it from increasing its shareholding without Reynolds’ consent.

As early as next month, then, BAT could legally start buying up further Reynolds shares. However, BAT’s CEO Nicandro Durante has said he would not consider a hostile takeover bid.

What This Means: It’s hardly surprising that a Blu-less Reynolds-Lorillard is pinning its hopes on Vuse; or that Imperial wanted Blu, which as we noted yesterday makes a nice consumer-market complement to its existing and forthcoming pharmaceutical e-cig products. (It would be intriguing, though, to know just how much of a deal-breaker getting Blu was for Imperial.)

But many questions remain. How will an international Vuse, as a joint project of the new Reynolds and BAT, co-exist with BAT’s current brands, particularly the cigalike Vype?

And, easily overlooked, will Blu continue to flourish under Imperial? Much of Lorillard’s infrastructure including the bulk of its sales force will move to Imperial, but the new owner’s U.S. experience until now has been limited.

– Barnaby Page ECigIntelligence staff

Photo: Christine Zenino

Barnaby Page

Editorial director

Before joining ECigIntelligence in early 2014 as one of its first employees, Barnaby had a 30-year career as a reporter and editor for newspapers, magazines and online services, working in Canada, the US and the Middle East as well as his current British location. He has edited publications covering fields including technology and the advertising industry, and was launch editor of the first large daily online news service in the British regional media. Barnaby also writes on classical music and film for a number of publications. Barnaby manages the editorial and reporting teams and works closely with the analyst teams, to ensure that all content meets high standards of quality and relevance. He also writes for the site occasionally, mostly on science-related issues, and is a member of the Association of British Science Writers.