Reynolds gains in menthol, gives up e-cigarette brand

Tue Jul 15, 2014 4:58pm EDT
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By Anjali Athavaley and Siddharth Cavale

(Reuters) - Reynolds American Inc's proposed $25 billion acquisition of smaller rival Lorillard Inc shows how the tobacco company is placing its bets on the market for menthols even as a growing number of smokers opt for e-cigarettes.

With the deal, Reynolds American picks up Newport menthol cigarettes, one of the few U.S. brands that is gaining share in a shrinking market. At the same time, Reynolds is giving up blu - the top-seller in the e-cigarette market seen by many as the tobacco industry's future - to Britain's Imperial Tobacco Group.

As part of the deal, Imperial will buy Reynolds' Salem, Winston and KOOL and Lorillard's Maverick brands in a move meant to ease potential antitrust concerns. Experts say that still may not satisfy regulators.

Sources familiar with the transaction said gaining the blu brand made the deal more attractive to Imperial. While cigarette sales volume has been falling about 4 percent a year, e-cigarette sales have been booming. Reynolds sells its own e-cigarettes under the Vuse brand but controls less than 5 percent of the market, according to market research firm Euromonitor International.

But Reynolds' chief executive officer, Susan Cameron, says Vuse has a "superior technology" that will make it a strong contender in the e-cigarette market. The company, which started selling Vuse roughly a year ago in Colorado and Utah, is rolling out the product nationwide this quarter.

Meanwhile, Reynolds' purchase of Lorillard's Newport brand gives the company a stronger presence in the market for menthol cigarettes. Menthols now make up 31.4 percent of the total market compared with 26 percent in 2002, according to Morningstar.

"The e-cigarette category is very small today," said Cameron. "It's growing and consumers are interested in it, but this transaction is really about adding Newport to our portfolio."

Menthol is a mint-flavored additive that may reduce the irritation and harshness of smoking when used in cigarettes, according to the U.S. Food and Drug Administration.   Continued...

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