BRISTOL, U.K. -- It was an historic day for Reynolds American Inc., acquiring the third-largest tobacco company in the United States, its close competitor, Lorillard Inc. (click here for coverage). The day was equally newsworthy for Imperial Tobacco Group PLC; the British company is set to become the third-largest player in the U.S. market by acquiring a number of brand divestitures and other assets from the Reynolds-Lorillard deal.
The $7.1-billion purchase agreement, as reported in a 21st Century Smoke/CSP Daily News Flash, will include Reynolds' Winston, KOOL and Salem cigarette brands, as well as Lorillard's Maverick cigarettes and blu eCigs. Additionally, Imperial will acquire Lorillard's Greensboro, N.C., factory and offices, along with a substantial amount of the company's sales force.
As Imperial's chief executive Alison Cooper said during a Tuesday webcast, the deal will transform the company "from a distant No. 5 in the (U.S.) market with a 3% share, to No. 3 with a 10% share; from no presence in e-cigarettes in the U.S., to market leadership with the clear No. 1 brand; from a business that has focused on 19 states, to national distribution supported by an experienced sales force; and from a newish management team with a growing track record, to the opportunity to combine the best of both companies to create a strong management team.
"The primary assets for us will be Winston and blu," Cooper continued. "In line with the approach we are taking within the existing portfolio, the primary brands will be the focus for the lion's share of time and money invested."
In terms of its cigarette business, which will include three of the top-10 cigarette brands alongside Imperial's existing Commonwealth-Altadis USA Gold Brand, Winston will be the top focus.
Winston "is the second–most-popular brand in the world, so clearly has brand equity," Cooper said, "equity which we know exists in the U.S. but has been untapped in recent years. It currently has around 2.1% market share in the U.S., and is No. 7 in the market, despite having had little or no investment for a number of years."
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Cooper added that the brand has already proven that, when given the proper attention, it can be a dominant player. Outside of the U.S., the brand is owned by JTI, which has increased volume by more than 100 billion cigarettes over the past 10-plus years, making Winston the world's No. 2 brand.
"It has strong residual-brand equity with consumers, a great quality perception and is widely recognized," said Cooper. "What has been lacking is focus, investment and clear and consistent positioning ... and that is what we can put right."
Imperial intends to compliment Winston with either KOOL, Maverick or USA Gold on a state-by-state basis. Cooper said that Salem "will be largely run for cash in line with our existing portfolio strategy."
"We have a plan ready for execution on day one that has the portfolio clearly segmented into primary and secondary focus for each individual state, with appropriate investment allocations," she continued.
As valuable as inheriting three top-10 cigarette brands might be, it's perhaps Imperial's acquisition of blu that could cause the most shakeup within the industry; with 45% of the U.S. retail share, blu is the clear industry leader of the more than $1.5-billion electronic-cigarette industry.
"This gives us immediate leadership in e-cigarettes with the No. 1 brand in the U.S., and it has great international growth potential," Cooper said. "[blu] is a strong brand franchise, and it's recognized that Lorillard has done a great job at building the brand in what remains a highly fragmented market."
She said that blu would nicely compliment Imperial's existing e-cigarette business, The Netherlands-based Fontem Ventures.
"It is a rapidly evolving market where consumer interest and trial has possibly run ahead of the ability of the technology to deliver consistent consumer satisfaction," said Cooper. "But that is what provides us the opportunity in future."
Besides the cigarette and e-cigarette brands, Imperial will be landing Lorillard's established infrastructure within the United States, something Cooper said would be key in expanding the company's presence from 19 states to all 50.
Most notably, former Lorillard CEO Marty Orlowsky will immediately take on the title of executive chairman designate over Imperial's expanded U.S. business, overseeing the upcoming transition.
"In management, Marty, together with senior resource from Imperial, will lead the integration, preparing for the combined business to get going immediately once the transaction completes," Cooper said. "Beneath him, we will have access to management formerly at Lorillard. Within sales, we will significantly add to our capabilities as we assimilate an experienced and proven team. The combination of the assets being acquired, together with Commonwealth-Altadis, will give us strength in management, in sales force capability, in manufacturing and in infrastructure."
Cooper expressed confidence that this more powerful and experienced sales force, combined with a more complete portfolio, would be more appealing to consumers and provide "critically far more relevance" for retailers.
"We will now be more important to retailers nationally and to more key accounts," she said. "More sales visits and better account coverage will help us achieve a more significant share of voice, meaning greater shelf space, merchandising and point-of-sale presence. Overall, we will have greater retail influence."
"Behind all of this, we will create a team which will be made up of the best of both organizations, a team with strong relationships with both the brands and the customers," Cooper said. "A well-planned and well-executed integration process will mean that we hit the ground running."
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