U.S. tobacco mega-deal leaves Imperial with best-seller Blu

Written by || 15 July, 2014 || Business news analysis |

gorilla 300x180U.S. tobacco giant Lorillard is losing its best-selling e-cigarette brand Blu to British counterpart Imperial Tobacco, as part of a complex four-way deal which sees Reynolds American pay $27bn for Lorillard while Imperial picks up a number of key brands from both.

Meanwhile, the new Reynolds-Lorillard combination has also agreed to develop future e-cigarette products with another UK firm and current Reynolds shareholder, British American Tobacco.

The takeover announced this morning after months of speculation will create a combined Reynolds-Lorillard – expected to be known by the Reynolds name – with turnover of about $15bn, making it still second to U.S. tobacco market leader Altria, but a much closer competitor than either Lorillard or Reynolds was alone.

It will also give Imperial a significant foothold in the U.S. for the first time, as it takes over the Winston, Salem and Kool tobacco brands from Reynolds and Maverick from Lorillard, as well as Blu. It will pay about $7bn for the portfolio and other assets.

That leaves the new Reynolds with Newport, Camel, Pall Mall as its main brands in combustible tobacco, occupying the second, third and fourth slots in the sales charts after Altria’s Marlboro. It will also have the Natural American Spirit additive-free brand, as well as Grizzly in smokeless tobacco, all adding up to what it described as “the most balanced offering in the industry”. It hopes for more distribution clout, too, by combining Reynolds’ strength in the western U.S. with Lorillard’s in the east.

Hello there

In e-cigarettes, the surprising divestiture of Blu will change the U.S. market even more dramatically, ushering in a new major player while possibly waving farewell to another.

For all that it will be much more powerful in tobacco, the new Reynolds will have in the e-cig market only Vuse, the existing Reynolds product which has been trialled in two states and is just now set for national distribution.

But Imperial will gain Blu, which has national distribution throughout the U.S. and a clear sales lead there, as well as a UK presence. Currently, Imperial’s only e-cig product on the market is Puritane in the UK, although it is putting another through the pharmaceutical licensing process in that country and also holds a clutch of e-cigarette patents via its Fontem Ventures subsidiary.

“The addition of these brands to Imperial’s U.S. operations will more than triple its share of the U.S. cigarette market, position it for long-term success in traditional tobacco products and the growing e-cigarette category, and elevate it to the status of a major U.S. competitor for the first time,” the companies said.

Imperial will also take over Lorillard’s manufacturing and R&D facilities in Greensboro, North Carolina.

Up to BAT

For all that Imperial is apparently being handed the prize e-cig brand, however, Reynolds may have more to come. A further deal with British American Tobacco (BAT) – which already holds 42% of Reynolds, and will continue to hold the same stake in the combined Reynolds-Lorillard – will have the two companies pursuing “an ongoing technology-sharing initiative for the development and commercialisation of next-generation tobacco products, including heat-not-burn cigarettes and vapour products”.

The Reynolds-Lorillard takeover is priced at just under $70 per Lorillard share, less than figures such as $80 which had been previously suggested by some commentators. It still requires regulatory approval, which Reynolds expects in the first half of 2015, as well as support from shareholders.

What This Means: The first instinct may be to ask what this means for Altria, which faces a much heftier rival for its position at the top of the U.S. tobacco market. But in e-cigs, it probably doesn’t mean much, at least not immediately.

Altria has been slow to bring non-combustible products to market, but appears wholly serious about them, and there is no reason to imagine this will deter it; Blu remains exactly the competitor it always was, albeit under different ownership; and new Reynolds is not obviously better off in e-cigs than old Reynolds.

(Vuse was internally developed by Reynolds, whereas Blu was bought in by Lorillard, which may have been one reason behind the decision to retain the former. Reynolds’ CEO Susan Cameron also spoke today of Vuse’s “superior technology”, though it wasn’t clear whether she was specifically referring to Blu.)

The relative positions of Big Tobacco in e-cigs could still change in several ways, though. New Reynolds, bolstered by the market experience of Lorillard (although most of the Lorillard sales force has gone to Imperial), could seek to replicate with Vuse what was achieved with Blu. And Imperial suddenly becomes a major e-cig player, perhaps set to follow a twin-track strategy with consumer brands like Blu alongside pharmaceutical brands like Puritane and its upcoming British product.

– Barnaby Page ECigIntelligence staff

Photo: Heather Paul