In mid-July, Reynolds American made the announcement that it plans to acquire Lorillard — maker of Newport, Kent, Old Gold and other cigarettes and owner of the Blu e-cigarette brand. This acquisition will cost Reynolds $27.4 billion — more than ten times the current annual revenue of the entire e-cigarette industry. When the proposed deal is made final, America’s Big Tobacco industry will be pared down to two major players; Altria and its flagship Marlboro brand will remain the industry leaders by a wide margin and Reynolds will be a slightly less distant second place.
If this deal succeeds, it won’t just narrow the field in an American tobacco industry that already lacks a healthy level of competition. It also means that some of the world’s best-known cigarette and e-cigarette brands are — or will soon be — British-owned.
When $35 Billion Isn’t Enough
According to the World Lung Foundation, the total profits of the world’s six largest tobacco companies exceeded $35 billion as of 2010. That’s about the same as the combined profits of Microsoft, Coca-Cola and McDonald’s. The only thing a large company wants more than profit is more profit, though, and that has become difficult. The evidence suggests that in most of the world’s developed nations, the smoking rate declines every year. As for Reynolds, their stock consistently outperforms the S&P 500 but their revenue continues to slide each year while Lorillard’s earnings have been on the rise thanks in part to its acquisition of Blu — quite a story for an e-cigarette company that has risen to the top of the ranks after apparently receiving a bit of early help from the porn industry.
So, this deal promises to make more money for Reynolds, shareholders of both companies, and the good old U. S. of A. Or does it?
Reynolds American — the company that was known as R. J. Reynolds before a merger with British American Tobacco in 2004 — is, in fact, 42 percent British-owned. Reynolds, keenly aware of the regulatory attention the acquisition of Lorillard would attract, agreed to sell Lorillard’s Blu e-cigarette brand as well as its own Kool, Winston and Salem cigarette brands to British American Tobacco’s competitor Imperial Tobacco for $7.1 billion — and that’s not all. In addition, Lorillard’s manufacturing and R&D facilities in North Carolina, along with 2,900 employees, will also become the domain of queen and country. With an already incestuous industry about to become even more so, the Federal Trade Commission has evidently said “not so fast.”
Lorillard Acquisition Attracts Regulatory Scrutiny
According to an article published on CSPnet and elsewhere, the FTC has sent notifications to both Reynolds and Lorillard requesting additional information from both companies about the pending acquisition. Although this is a normal part of the acquisition process under the Hart-Scott-Rodino Antitrust Improvements Act, some speculate that Reynolds may have to part with more to get this deal finalized and ensure some semblance of healthy competition between tobacco companies in the future.
Other analysts have also chimed in, stating that Reynolds American’s acquisition of Lorillard has, at best, a 40 percent chance of being approved as the deal currently stands.
How do you feel about this deal, and how do you think it will impact the e-cigarette industry? Were you aware that the second largest American tobacco company was already nearly half owned by British interests — and do you care that more of America’s top cigarette brands could be heading across the Atlantic? If you are a Blu user, do you anticipate changing brands if this acquisition goes through? Leave your comments below or on my Facebook page.