US tobacco industry to shrink to two firms

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br fags (43285155) Bloomberg Packs of Reynolds American cigarette brands are pictured in a demonstration. A merger of Reynolds and Lorillard will help the firms cope with the slowdown in the US cigarette market and create a more potent competitor to market leader Altria. Photo: Bloomberg

New York and London - Reynolds American, the producer of Camel and Pall Mall cigarettes, has agreed to buy rival Lorillard for $27.4 billion (R293bn) including debt in a deal that reduces the 400-year-old US tobacco industry to two major competitors.

Reynolds will pay a mixture of cash and stock valuing each Lorillard share at $68.88, according to a statement.

British American Tobacco (BAT) will maintain a 42 percent stake in Reynolds.

Imperial Tobacco Group of the UK will acquire brands from the merging companies including Kool and blu e-cigarettes for $7.1bn.

After years of anti-tobacco health campaigns, slumping demand has put pressure on the industry to consolidate.

US cigarette shipments fell by a median of 2.9 percent in the first quarter among the nation’s top tobacco firms, Bloomberg data show.

Merging Reynolds and Lorillard would help the firms cope with the slowdown and create a more potent competitor to market leader Altria.

“It’s transformative because it creates a duopoly in the US and will help them to manage the volume declines,” Philip Gorham, an analyst at Morningstar in Amsterdam, said before the transaction was announced. “They are still getting younger smokers in developed markets, but not at the same rate as the old ones are dying off.”

The deal – which followed months of on-again, off-again talks – is complicated by its size and the involvement of several companies. It will also have to pass antitrust hurdles.

Together, Reynolds and Lorillard have a market value of about $58bn and annual sales of more than $13bn, according to Bloomberg data. Merger speculation has propelled stocks of both companies this year.

Lorillard’s biggest product, Newport, will give Reynolds fresh ammunition against Altria, whose brands account for more than half of the US retail cigarette industry. Altria’s Marlboro by itself has market share in the US of about 44 percent, according to the company’s website.

Reynolds, Lorillard and London-based BAT had been in talks since last year to reach an agreement that would satisfy all three parties, people familiar with the matter have said. They made a tentative deadline of this month to reach a deal because of a standstill agreement by BAT not to raise its stake in Reynolds without the approval of Reynolds’s board until this month.

BAT’s agreement keeping it from increasing its stake in Reynolds dates back to the merger of RJ Reynolds Tobacco Holdings with Brown & Williamson Tobacco.

The Federal Trade Commission (FTC) was likely to take a hard look at the latest proposed transaction, said David Balto, a Washington attorney and former policy director for the FTC who litigated BAT’s merger with Reynolds in 2004.

The FTC allowed that deal to go through because Brown & Williamson was losing market share and Lorillard was still a viable competitor, according to a brief released by the FTC. Balto said the market was more consolidated now, and this deal would face serious scrutiny.

“The FTC will be very concerned about competition in this market,” he said.

“The FTC will want to make sure some level of competition is restored.”

There was a chance that just selling off the minor brands to Imperial would not be enough, he said. – Bloomberg

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