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 Today, the U.S. tobacco company’s marketing and distribution muscle,
including its use of frequent TV commercials and concert
sponsorships, has taken blu into 149,000 outlets and driven its U.S.
market share to about 47 percent. Annual sales have quadrupled to
more than $200 million.
The turbo-charged growth means that blu and Lorillard's British
SKYCIG e-cigarette brand may be the assets with the sweetest
potential for Reynolds American Inc as it holds talks over a deal to
acquire its U.S. rival. Both brands would complement Reynolds' new
Vuse e-cigarettes brand, due to go national this summer, and vault
the combined company into an undisputed leadership position in the
young market.
And the gains in e-cigarette sales may have only just begun. Some
Wall Street analysts see e-cigarettes and other “vapor products”
overtaking traditional tobacco sales within six years.
"Acquisition of Lorillard would give Reynolds a distinct advantage
in the e-cig market," said Steve Marascia, Director of Research at
Capitol Securities Management.
Reuters reported last week that the companies were in late- stage
talks that would combine the second and third-largest U.S. tobacco
companies, according to people familiar with the matter. A
combination of Lorillard and Reynolds, which is 42 percent owned by
British American Tobacco, would create a formidable rival to Altria
Group Inc, which owns the Marlboro brand and controls about 50
percent of the traditional cigarette market in the U.S.
E-cigarettes are slim, reusable, metal tube devices containing
nicotine-laced liquids that come in exotic flavors. When users puff,
the nicotine is heated and released as a vapor containing no tar,
unlike conventional cigarette smoke.
Taking the lead position in e-cigarettes is appealing but given the
market’s nascent nature, it is not a sure bet.
New brands could easily grab market share, and there have been signs
that other vaping products, including larger "tank"-based devices,
may be gaining popularity. These products are typically less
expensive to use, and can provide a stronger nicotine delivery.
"I think it's more of a hedge," said Morningstar analyst Philip
Gorham in reference to the e-cigarettes part of any Lorillard
acquisition. "But if e-cigs take off, it will be the future, and
they'll be glad they invested."
MORE THAN MENTHOL
Lorillard's popular Newport menthol cigarette brand, whose sales
have held steady even as cigarette smoking in the United States has
declined, is likely to be the immediate driver of any deal. Newport
accounts for 37 percent of the U.S. menthol market and 12.5 percent
of overall cigarette sales.
U.S. sales of conventional cigarettes are forecast to drop to $15.3
billion in 2023 from $28.3 billion in 2013, according to a recent
report from Wells Fargo Securities. In contrast, it sees revenue
from e-cigarettes and other vapor devices growing to $24 billion by
2023 from $1.5 billion last year.
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Altria is also getting into the game, though it only introduced its
MarkTen brand in August 2013 in Indiana. It plans a nationwide
rollout next month.
Lorillard bought blu two years ago from founder Jason Healy and his
investors for $135 million. A year later, it paid $49 million for
SKYCIG, now the leading e-cigarette in Britain.
The deals were part of a strategy by Lorillard CEO Murray Kessler to
expand its offerings beyond conventional cigarettes. Formerly at
Altria, he helped build that company's Skoal and Copenhagen into two
of the best-selling smokeless, or chewing tobacco, brands.
Morningstar analyst Gorham estimates blu is currently worth $500
million to $1 billion, though it may account for a higher number in
any deal for Lorillard, whose overall market value is currently
about $22 billion. "Because Big Tobacco really wants a piece of the
action, I could be low-balling it," he said.
Since the vapor market is still in its early stages, it is difficult
to anticipate how it may evolve.
Regulatory changes could have a big impact. In April, the U.S. Food
and Drug Administration issued proposed rules that would ban sale of
e-cigarettes to anyone under 18 and require companies to list
ingredients. But the rules so far would not restrict flavored
products, online sales or advertising.
The big tobacco companies are expected to be in a much better
position than their dozens of smaller rivals to handle any new
oversight thanks to their long experience dealing with regulators
and battling anti-tobacco lawsuits.
They may also have an upper hand in assuring quality control as the
industry comes under stepped-up scrutiny after recent horror stories
about the dangers of accidental poisoning from some ingredients on
the market.
"The big three tobacco guys will be the big three e-cigarette
companies because of their resources, relationship with distributors
and ability to comply with the FDA faster than competitors," RBC
Capital Markets LLC analyst Nik Modi said, referring to the U.S.
Food and Drug Administration.
(Reporting By Jilian Mincer; Editing by Martin Howell)
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