Now sales growth is slowing from a 2011 peak and private funds are
more cautious about the smokeless devices, making it harder for
independent e-cigarette firms to raise capital and hitting their
The entry of Big Tobacco and a push for tighter regulation has led
outside investors to question the potential of the e-cigarette
market, where sales are at a modest $3.5 billion worldwide but still
growing faster than for most consumer goods.
"Everybody knows regulation is coming so investors are concerned
about investing in companies that won't be able to meet those
rules," said Craig Weiss, CEO of NJOY, one of the more established
e-cigarette makers, which sources say could pursue an IPO or a
takeover by tobacco or healthcare firms.
The World Health Organization last month called for bans on indoor
use, advertising and sales to minors of the metal tubes that heat
nicotine-laced liquid into vapor, arguing that the jury was still
out on how safe they were.
This would go further than the European Union's rule coming into
force in 2016 to ban advertising and regulate nicotine content, and
a proposal by the U.S. Food and Drug Administration (FDA) to ban
sales to minors.
"For smaller companies, it is challenging – they have to answer for
FDA uncertainty and questions about Big Tobacco," Weiss said.
Gamucci, one of Britain's earliest e-cigarette makers, has been
seeking capital for about 12 months, while rival E-Lites weighed
options for a year before agreeing in June to sell out to Big
Tobacco's No. 3 player, Japan Tobacco.
With sales of traditional cigarettes declining in many countries due
to health concerns, almost all the major tobacco companies have
either bought e-cigarette companies or set up in-house development.
This means the independent players must be extra nimble.
Gamucci CEO Tony Scanlan, who worked at a leading tobacco company
for 17 years before branching out, told Reuters Gamucci is close to
securing an injection of about 20 million pounds ($32.4 million) and
may weigh going public when it gets bigger.
It is planning a new range that is refillable rather than disposable
in line with market trends and is considering marketing products as
medical devices, as British American Tobacco's Nicoventures unit is
Innovation is now key to survival in a business whose products have
piqued consumer interest, but not loyalty.
"Last summer ... you were seeing a big build-up of consumer trial,
but that trial hasn’t come through to regular usage,” said Martin
Deboo, an analyst with Jefferies.
He cited research showing that half of all smokers had tried
e-cigarettes but only 10 percent said they were regular users.
"The first generation 'cig-a-likes', from a smokers' point of view,
have only been a partial solution," Deboo said.
Lorillard, America's No. 3 tobacco firm and No. 1 e-cigarette firm,
said e-cigarette sales fell 35 percent to $37 million in the quarter
to June 30, but its retail market share fell only 1.1 percent, which
suggests the entire category shrank dramatically.
"APPLE PIE" TO "ZOMBIE JUICE"
Some vapers complain that with the slim, disposable e-cigarettes,
poor vapor quality makes the nicotine hit weaker than with tobacco,
that battery life is too short, and that they are too pricey, at as
much as $15 a day for a very heavy user.
As such, they have been losing share to next-generation models that
pack a bigger puff at a lower price in a market of which 70 percent
is in the United States and Europe.
"You'd be hard-pressed for someone to invest today in the smaller,
independent e-cigarette companies because it's tough to know whether
they'll ever get distribution," said a source financially involved
in the sector.
"Investors are shifting their attention now, trying to figure out
what other areas they should be investing in."
One such area is so-called vaping products, a rainbow of
do-it-yourself tanks, batteries and e-liquids.
U.S. financial services giant Wells Fargo estimates that business at
$1.1 billion of a $2.5 billion U.S. vapor market including
e-cigarettes. Particularly bullish, it says vaping could surpass
smoking in the U.S. in the next decade.
Data gatherer Nielsen, which tracks retail sales but not online or
at specialty "vape shops", says that for the 52 weeks ended August
23 e-cigarette and tank revenue in the US grew 19 percent. But that
was down from 125.5 percent growth for the same period ending in
2013, 133 percent in 2012 and almost 1,103 percent for 2011.
Some predict regulation may slow that down further due to fears
vaping may become a gateway to smoking for kids, with e-liquids in
thousands of flavors with names ranging from the quaint Apple Pie to
the outlandish Zombie Juice.
A recent drop in the value of a group of e-cigarettes companies
trading mostly over-the-counter on the Pink Sheets in the U.S.
highlights the growing caution.
[to top of second column]
Nine companies had a combined market capitalization of $743.3
million at the close of trading on Wednesday, down nearly 60 percent
from a March peak of $1.84 billion, though still up on a year ago.
Electronic Cigarettes International Group, by far the largest, saw
its shares close at just $5.50 on Wednesday, down from the high
teens in March.
It went public in a reverse merger last year, and has since done a
string of deals as small players seek consolidation in a market
still home to hundreds of brands.
"The key driver is that by doing this, they're better able to
compete with the tobacco companies," said Mark Winkler of Fleming
Family & Partners, who advised British e-cigarette maker Skycig on
its sale to Lorillard in October for 30 million pounds ($49.58
million) plus future payments.
In May, Michigan-based ECIG filed for a follow-on public offering to
raise up to $149.5 million and in July announced a $20 million
investment from an arm of Egypt's Mansour Group.
Shares in the second-biggest traded firm, 22nd Century Group, have
more than halved since its March high of $6.34, even though its
shareholders at the time of filings this summer included funds
managed by the likes of Vanguard, Fidelity and TIAA-CREF.
BIG TOBACCO VS PHARMACEUTICALS?
The major tobacco companies do not face the same pressure, since
their investments in the sector are tiny compared with the size of
their traditional businesses and serve as a hedge against declining
British American, the world's No. 2 tobacco firm, set up a unit in
2011 to develop smokeless alternatives and bought UK based CN
Creative the following year. It sells an e-cigarette called Vype in
Britain, while Reynolds American, in which it holds a large stake,
is rolling out an e-cigarette called Vuse across America.
U.S. Marlboro maker Altria Group bought Miami-based Green Smoke for
$110 million in April, and in July Lorillard agreed to sell Skycig
and Blu, which it bought for $135 million in 2012, to Gauloises
maker Imperial Tobacco.
Before exploding in the last four years, e-cigarettes were simple
devices largely sold on the Internet, so even though there was
venture capital and private equity interest, capital needs were
Now that they grace shelves all along the high street, many
companies must invest in slotting fees, quality control, supply
chain and marketing to drive and keep market share. That crimps cash
flow, making them less attractive to private equity firms who need
near-term profits to service their debt, said Winkler.
And while some independent companies may still be able to sell out
to a bigger company or go public, he said there is concern that many
others may get trampled, leaving investors with no exit strategy.
"There will be some independents who will be very successful, but I
anticipate that many may struggle to achieve an exit at the end of
the day," Winkler said.
The healthcare industry may be some help.
NJOY, which has had several fund injections from private equity and
venture capital funds and others including Silicon Valley
heavyweight Sean Parker, has attracted interest from both major
tobacco and pharmaceutical firms, according to two sources familiar
with the matter. It was not clear which companies, or whether any
talks took place.
Buying e-cigarette makers may eventually make sense for healthcare
companies since they threaten the nicotine replacement therapies
offered by the likes of Pfizer and GlaxoSmithKline.
BAT's Nicoventures unit, in conjunction with Consort Medical and
Kind Consumer, has had a new nicotine inhaler called Voke licensed
in the UK as a medical product, the companies said on Friday.
NJOY, which just launched new lines of rechargeable and vape
products in flavors like blood orange and butter crunch, declined to
comment on any such approaches, but CEO Weiss said, "if the right
type of investor approached us, I would have to listen".
(1 US dollar = 0.6203 British pound)
(Additional reporting by Vincent Flasseur, Anjuli Davies and Frey
Berry in London and Olivia Oran in New York; editing by Philippa
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