Acquisition talks show Reynolds' taste for menthol

Sat Jul 12, 2014 10:51am EDT
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By Anjali Athavaley

NEW YORK (Reuters) - The enduring popularity of menthol may be a big motivator behind Reynolds American Inc's (RAI.N: Quote) interest in buying smaller rival Lorillard Inc LO.N, which has the best-selling U.S. cigarette brand with the additive.

While potential cost savings from economies of scale in a declining industry may be the main driver for the multi-billion-dollar deal, Lorillard's leading U.S. menthol cigarette Newport is another key draw.

Menthol cigarettes have roughly a 28 percent market share in the United States, according to market research firm Euromonitor International. Experts say the mint-flavored additive enjoys disproportionate popularity among minorities, especially African-Americans, and young people.

Reynolds is in talks to acquire Lorillard, which has a market capitalization of $22.9 billion, in a deal that would reshape one of the world's most profitable tobacco markets.

Adding Newport to its product lineup would allow Reynolds, maker of Camel cigarettes, to broaden its reach among minority and younger smokers.

Menthol may reduce the irritation and harshness of smoking when used in cigarettes, according to the U.S. Food and Drug Administration. The category is declining but at a slower rate than nonmenthol cigarettes. According to a report by Cowen & Co., menthol sales volumes have fallen at 2 percent annually for the last 10 years compared to a 4 percent decline for nonmenthol cigarettes.

Still, menthols face risks as the FDA considers restrictions on the substance, which is regulated in medical products but not in cigarettes. The agency last year released a preliminary review that said that a majority of African-American smokers use menthol cigarettes. Menthols were also associated with lower socioeconomic status, according to the FDA review of available studies.

Those studies showed that menthol in cigarettes was likely associated with reduced success in quitting smoking, especially among African-Americans, the review said. The agency declined to comment Friday on the timing of any possible regulatory actions.   Continued...

Newport and Camel cigarettes are stacked on a shelf inside a tobacco store in New York July 11, 2014.  REUTERS/Lucas Jackson