US tobacco giants merge

America’s number two and number three tobacco firms are joining forces in a $27bn deal. Reynolds, maker of Camel cigarettes, is taking over Lorillard, whose most famous brand is Newport menthol, America’s second-biggest seller. The new entity expects to generate over $11bn in sales and $5bn in operating income.

It’s selling off several brands to Britain’s Imperial Tobacco for $7.1bn in a bid to placate regulators. These brands include e-cigarette bestseller Blu, Salem and Winston. British American Tobacco, which owns 42% of Reynolds, will spend $4.7bn buying additional shares to maintain that level of ownership.

What the commentators said

The deal requires Reynolds “to make a couple of huge bets”, said Mike Esterl and Peter Evans in The Wall Street Journal. Smoking is dwindling in the US – 18% of adults smoke cigarettes, down from 43% in 1965 – but menthol cigarette use is growing. Hence Reynolds’ interest in Newport.

Yet, the Food and Drug Administration is worried that menthols seem to make it easier to start smoking and harder to stop, so it could well clamp down on them.

Meanwhile, Reynolds is also betting that it can thrive in the small, but fast-growing e-cigarette market without Lorillard’s Blu. It is betting on its own product, Vuse, instead. It only began to roll it out last month.

Strategically, the deal is hardly risk-free, agreed Kevin Allison on Breakingviews. Yet the shares of both firms have jumped since the news. Chalk that up to the scope for “aggressive pricing”.

Reynolds and Lorillard say this deal will produce a stronger competitor to Altria, the Marlboro manufacturer, which now accounts for half of US cigarette sales. But Altria’s shares have risen too.

No wonder, said Nils Pratley in The Guardian. Altria has around half of the US market, while the new group will control around 35%. That’s a “powerful and entrenched” duopoly that Imperial, with a US market share of 10%, up from 3%, is now up against. Imperial has also borrowed to pay for brands that, apart from Blu, look like “wheezy also-rans”.

Blu, with 45% of the US market, looks promising, said Alex Brummer in the Daily Mail – unless regulators turn against e-cigarettes, because they decide they are “just training for the real thing”.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.