E-cigarettes could sweeten potential Reynolds-Lorillard deal

Fri May 30, 2014 1:24am EDT
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By Jilian Mincer

NEW YORK (Reuters) - When Lorillard Inc bought the blu eCigs brand two years ago, the electronic cigarette had a 10 percent share of a tiny U.S. market, generating about $50 million in sales. It was available in only 12,000 retail outlets and over the Internet.

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.   Continued...

An advertisement for the e-cigarette brand blu is seen on the window of a store in New York May 27, 2014. REUTERS/Shannon Stapleton