Editorial: Burning Questions from Tobacco Shakeup

What does this deal mean for retailers?

Published in Tobacco E-News

By  Melissa Vonder Haar, Tobacco Editor

OAKBROOK TERRACE, Ill. -- Welcome back to reality! After a blissful vacation where I somehow managed to fully avoid all work emails, this tobacco reporter awoke to the news that Reynolds American Inc. would indeed acquire Lorillard Inc. in what is arguably the biggest tobacco news this side of the millennium. 
 
The deal is far from being finalized (early 2015 by most predictions), leaving lots of room for speculation. After wading through yesterday’s landslide of press releases, conference calls and analyst viewpoints, here are some of the most pressing questions pertaining to the deal – and how it might affect your tobacco business:
 
Good or Bad for Competition?
That’s the biggest question of the day, or really, the biggest series of questions of the day. Does a combined Reynolds-Lorillard pose a stronger threat to Altria, thus giving the top dog less pricing power? Or does the new Reynolds use its improved market share to enforce stricter, less-retailer-friendly contracts? At the end of the day, will this be good or bad for tobacco retailers? Or will it have little to no effect? It’s clearly too soon to say and, as of a May CSP tobacco survey, retailers weren’t sure either: 37% said the then-potential deal would have a positive effect on their tobacco business, 33% predicted it would have a negative effect, 15% believe there would be no effect and 15% were unsure.
 
What Will the FTC Say?
Yes, Reynolds president and CEO Susan Cameron expressed confidence that the Federal Trade Commission (FTC) would approve the deal as-is (full story here). However, during yesterday’s press conference, Cameron also admitted that conversations had not yet begun with the FTC; the Greensboro News and Report also revealed Winston-Salem Mayor Allen Joines was told by Reynolds that “this is anything but a done deal with shareholders and regulators. It will be an arduous process.” The question remains: are the current proposed sell-offs from Reynolds and Lorillard to Imperial Tobacco enough to soothe concerns of a tobacco monopoly? Or will the FTC demand further divestitures?
 
Where’s My Newport Rep?
Perhaps the biggest effect this deal will have on day-to-day retail operations is the changing of Reynolds and Lorillard sales reps. In the May survey, some retailers said it would be easier to deal with fewer sales reps; others lamented the loss of a more retail-friendly Lorillard sales team with one retailer pointing out that “Lorillard has always been Switzerland: their culture has provided us with genuine consultants.” Though Imperial Tobacco stands to inherit the majority of Lorillard’s sales force, both Cameron and Lorillard chairman, president and CEO Murray Kessler highlighted that the agreement states it’s most of the team, not all. “As we go through the integration planning process, we have every intention of taking on portions of that Newport sales force,” Cameron said. Meaning not all retailers will be losing their Newport guy. Just most.
 
Will Reynolds Rue “Dumping” blu? 
In my humble opinion, this was the biggest shock of yesterday’s deal. Yes, Reynolds has invested heavily in Vuse, bringing production stateside; yes, Vuse has done incredibly well in its Colorado and Utah test markets; and yes, Vuse is a proprietary electronic cigarette brand, as opposed to an acquired brand like blu. But with blu absolutely dominating the current electronic cigarette market (with a 45% share), the move surprised even seasoned analysts Wells Fargo’s Bonnie Herzog, who wrote in a research note that she had believed Reynolds would “pursue a multi-brand ‘portfolio’ strategy in vapor” with both Vuse and blu. Cameron described the divestiture of blu as “a business decision” and “important” in making Imperial a solid No. 3 player; she added that the sale highlighted the company’s confidence in Vuse. Only time will tell if this belief that Vuse is a “game-changer” is warranted – or if blu will continue to reign supreme.
 
Is Another Shakeup Already in the Works?
It’s been acknowledged that part of the pressure to get this deal done was the fact that a 10-year standstill preventing British American Tobacco from increasing its current 42% share in Reynolds expires at the end of July. And though the U.K. company played a role in the acquisition of Lorillard, investing approximately $4.7 billion in the new Reynolds to maintain that 42% share, Herzog predicted that the “probability of (British American Tobacco) acquiring (Reynolds) is now higher in our view.” Last week, The Daily Mail reported British American Tobacco was willing to pay as much as $75 a share to purchase the remaining 58% of Reynolds stock: will they feel the same about the new company?
Keywords: 
M&A