A BAT deal with Reynolds adds to Big Tobacco's e-cig advantage

Tue Oct 25, 2016 5:32pm EDT
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By Jilian Mincer and Martinne Geller

NEW YORK/LONDON (Reuters) - British American Tobacco Plc's proposed takeover of Reynolds American Inc could speed up Big Tobacco's dominance of the quickly changing e-cigarette market, putting more pressure on early innovators already getting squeezed out.

BAT offered last week to buy its U.S. peer for $47 billion (38.54 billion pounds) in a deal that would combine Lucky Strike and Newport cigarettes, and Vuse and Vype e-cigarettes. Reynolds has yet to respond to the unsolicited approach.

A combination would create a company with significant share of two of the biggest e-cigarette markets - the United States and United Kingdom - and pit it more directly against the efforts of rival Philip Morris International Inc, and U.S. partner Altria Group Inc, to devise a successful alternative to traditional cigarettes.

The deal is expected to spark further consolidation, such as a reunification of Philip Morris with Altria, analysts said. It would also put further pressure on smaller players Imperial Brands Plc and Japan Tobacco International to do deals of their own.

Electronic cigarettes and other alternatives to smoking are seen as the future of a tobacco industry whose sales are shrinking in Western markets as more people give up the deadly habit.

BAT and Reynolds already have a technology-sharing and licensing deal for their e-cigarettes, which produce vapor from liquid nicotine instead of tobacco smoke, but a full takeover is expected to speed and simplify innovation.

This is critical as Philip Morris and Altria work to launch a promising, new technology called iQOS - using tobacco instead of liquid - in the United States, the biggest market for "vaping" products.

"Leveraging that R&D more seamlessly across the enterprise is one of the big benefits" of the potential BAT deal for Reynolds, said Morningstar analyst Adam Fleck.IQOS and similar devices heat tobacco enough to create a vapor that its makers say is less harmful than the smoke derived from burning it. They could be more successful than e-cigarettes for smokers who find e-cigarettes unsatisfying.   Continued...

People walk past the British American Tobacco offices in London, Britain October 21, 2016. REUTERS/Stefan Wermuth