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
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.
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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".
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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