When Smoke Clears, What Will Reynolds-Lorillard Look Like?

Details of deals reveal surprising twists in combined company's focus, strategy

Published in CSP Daily News

By
Greg Lindenberg, Online Editor

Melissa Vonder Haar, Tobacco Editor

Reynolds Lorillard Newport Vuse (CSP Daily News / Convenience Stores / Tobacco)

WINSTON-SALEM, N.C. & GREENSBORO, N.C. -- In a deal that gives Reynolds American Inc.'s "transforming tobacco" tagline a new meaning in how it will change the landscape of the U.S. tobacco market, Reynolds American and Lorillard Inc. have entered into a definitive agreement in which Reynolds will acquire Lorillard for $27.4 billion.

The transaction will unite Reynolds, the No. 2, and Lorillard, the No. 3 tobacco company in the United States, creating a stronger No. 2 company to challenge Altria Group Inc.

And in a surprising twist, the combined Reynolds-Lorillard will pin most of its hopes on Newport menthol combustible cigarettes and the Vuse electronic cigarette and not, as many industry observers expected, on blu e-cigarettes.

As reported in a 21st Century Smoke/CSP Daily News Flash, Reynolds also has reached an agreement with Imperial Tobacco under which Imperial will purchase the blu eCigs brand; the KOOL, Salem, Winston and Maverick combustible cigarette brands; and other assets and liabilities for a total consideration of $7.1 billion ( click here for coverage). That deal will make Imperial the new No. 3 tobacco company in the United States.

"From a strategic standpoint, this combination is absolutely compelling," Susan Cameron, Reynolds's president and CEO, said during the conference call on the deal. "It will give us a unique portfolio of iconic brands as well as adding a geographic benefit from RJR's strength in the western U.S. and Lorillard’s complimentary strong presence in the eastern U.S."

The acquisition of Lorillard will "significantly strengthen and diversify" R.J. Reynolds' cigarette portfolio, resulting in the "most balanced offering in the industry" with brands including Newport, Camel and Pall Mall. The addition of Newport, which leads the U.S. menthol category, will be a key component of R.J. Reynolds' growth strategy. Lorillard reported that Newport ended 2013 with a 12.6% share of market, and the brand has demonstrated solid growth.

Cameron highlighted the "superior technology" of Vuse, "a product we believe will be a game-changer in the e-cigarette space. Since its expansion into Colorado in 2013 (its first major market), Vuse has delivered outstanding results and quickly became the category leader. … We can proudly say we are well under way with our national expansion. We have just expanded to 15,000 additional outlets, and we are on our way to full national distribution. All of which illustrates that Vuse has a bright future ahead of it. We will continue to compete with blu, as we have with Vuse already."

 

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