Big day: Blu has a new owner, U.S. tobacco has a new shape

dawn - Joiseyshowaa 300x180The U.S. tobacco industry ends this week with its biggest transformation in decades, as two of the top three major players merge and a new one enters the arena.

The $27bn acquisition of Lorillard (number three in the market) by Reynolds American (number two) is expected to complete on Friday following the removal of the final legal obstacle.

The deal had to be rubber-stamped by a federal district court thanks to a years-old judgement unrelated to the merger, which requires that the two obtain court approval for divesting any cigarette brands. Last month the acquisition was given the go-ahead by the Federal Trade Commission (FTC), the last hurdle at which it might plausibly have fallen.

The newly-combined company will be a much more fearsome competitor for market leader Altria. Although none of its brands will individually match Altria’s mighty Marlboro, it will hold the second, third and fourth slots in the sales charts with Newport, Camel and Pall Mall – as well as producing the best-selling e-cigarette, Vuse, already a Reynolds product.

But the acquisition will also bring a new heavyweight into the U.S. tobacco and e-cigarette markets in the shape of Britain’s Imperial Tobacco. It will take over the Winston, Salem and Kool tobacco brands from Reynolds and Maverick from Lorillard, as well as the one-time best-selling e-cigarette Blu, previously a Lorillard product. Imperial will put Blu into its Fontem Ventures subsidiary.

In essence, the U.S. tobacco market will be transformed overnight from Altria-Reynolds-Lorillard to Altria-new Reynolds-Imperial. The shedding of some Reynolds and Lorillard brands to Imperial was considered necessary in order to create a credible third player and prevent the creation of a duopoly.

Barbarians at the gate

In terms of corporate fortunes, it is perhaps the U.S. sector’s biggest change since Philip Morris (as Altria was then known) overtook R.J. Reynolds to gain the top spot in the 1980s.

The only comparable upheavals more recently were the sale of the Reynolds international business to Japan Tobacco in 1999, and the spinning-off of Altria’s non-U.S. operations to Philip Morris International in 2008.

In financial terms, it is by far the biggest U.S. tobacco deal since the legendary $30bn takeover of RJR Nabisco (as Reynolds was briefly and unhappily known while merged with a food company) by Kohlberg Kravis Roberts in 1988.

The deal announced 11 months ago is also said to be the largest ever led by a woman, Reynolds president and CEO Susan Cameron.

What This Means: Day one, not much, of course: it is likely to take months (at least) before the seismic effects of this shake-up in the industry are felt.

In e-cigarettes specifically, we fully expect that the newly-enlarged Reynolds will continue to pour resources into securing Vuse’s current lead on Blu and Altria’s MarkTen.

Imperial is hardly likely to give up on Blu in the U.S. – it still sells well despite some of the lustre having worn off, and there is always room for product improvements. But we expect that unlike Reynolds, Imperial (through Fontem) will devote much of its effort to expanding the Blu brand internationally rather than domestically.

The story of the Reynolds-Lorillard acquisition is really just beginning, and we will be watching and reporting on it closely.

– Barnaby Page ECigIntelligence staff

Photo: Joiseyshowaa

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