WINSTON-SALEM, N.C. & GREENSBORO, N.C. -- In a deal that gives Reynolds American Inc.'s "transforming tobacco" tagline a new meaning in how it will change the landscape of the U.S. tobacco market, Reynolds American and Lorillard Inc. have entered into a definitive agreement in which Reynolds will acquire Lorillard for $27.4 billion.
The transaction will unite Reynolds, the No. 2, and Lorillard, the No. 3 tobacco company in the United States, creating a stronger No. 2 company to challenge Altria Group Inc.
And in a surprising twist, the combined Reynolds-Lorillard will pin most of its hopes on Newport menthol combustible cigarettes and the Vuse electronic cigarette and not, as many industry observers expected, on blu e-cigarettes.
As reported in a 21st Century Smoke/CSP Daily News Flash, Reynolds also has reached an agreement with Imperial Tobacco under which Imperial will purchase the blu eCigs brand; the KOOL, Salem, Winston and Maverick combustible cigarette brands; and other assets and liabilities for a total consideration of $7.1 billion (click here for coverage). That deal will make Imperial the new No. 3 tobacco company in the United States.
"From a strategic standpoint, this combination is absolutely compelling," Susan Cameron, Reynolds's president and CEO, said during the conference call on the deal. "It will give us a unique portfolio of iconic brands as well as adding a geographic benefit from RJR's strength in the western U.S. and Lorillard’s complimentary strong presence in the eastern U.S."
The acquisition of Lorillard will "significantly strengthen and diversify" R.J. Reynolds' cigarette portfolio, resulting in the "most balanced offering in the industry" with brands including Newport, Camel and Pall Mall. The addition of Newport, which leads the U.S. menthol category, will be a key component of R.J. Reynolds' growth strategy. Lorillard reported that Newport ended 2013 with a 12.6% share of market, and the brand has demonstrated solid growth.
Cameron highlighted the "superior technology" of Vuse, "a product we believe will be a game-changer in the e-cigarette space. Since its expansion into Colorado in 2013 (its first major market), Vuse has delivered outstanding results and quickly became the category leader. … We can proudly say we are well under way with our national expansion. We have just expanded to 15,000 additional outlets, and we are on our way to full national distribution. All of which illustrates that Vuse has a bright future ahead of it. We will continue to compete with blu, as we have with Vuse already."
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In announcing the deal, she said, "Reynolds American and Lorillard have complementary core strengths and the addition of Newport to our operating companies' existing key brand portfolios--including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly--will enhance our ability to compete in the combustible cigarette and smokeless categories."
Murray Kessler, Lorillard's chairman, president and CEO, said, "Newport is a remarkable success story and has been a marquee brand, not only for Lorillard, but as part of the tobacco landscape. … It’s hard to find another consumer brand that can top [its] consistent success story. We attribute that success to incredibly strong brand equity, our expertise in full flavor and menthol, and favorable demographics--all of which bode well for continued success going forward. This long-term success story and the complimentary nature of Newport to Reynolds’ core brands was not lost on Reynolds’ board and management team, which is why we’re here today."
Following the transactions, Reynolds projects that it will have more than $11 billion in revenues and approximately $5 billion in operating income.
Reynolds said it expects the transactions to close at the same time, in the first half of 2015. Once the deal is done, during a transition period, R.J. Reynolds will contract manufacture KOOL, Salem and Winston for Imperial, and Imperial will contract manufacture Newport for R.J. Reynolds through a facility it is acquiring from Lorillard.
Cameron will continue as president and CEO after completion of the acquisition, and the company will keep its headquarters in Winston-Salem, N.C. Kessler will join Reynolds' board.
Cameron said that the company is confident that the review of the menthol category of the U.S. cigarette market underway at the Food & Drug Administration (FDA) will result in reasonable, science-based regulatory decisions.
The transaction will also fuel Reynolds' continued investment in its "transforming tobacco" agenda: "Leading change in the industry by driving innovation throughout its businesses, redefining enjoyment for adult tobacco consumers, reducing the harm caused by smoking and accelerating the decline in youth tobacco use."
Reynolds has a strong track record of successful integration efforts, such as those undertaken following the acquisitions of Santa Fe Natural Tobacco and American Snuff, and the business combination with Brown & Williamson Tobacco Corp. The company expects to achieve cost savings of approximately $800 million on a run-rate basis, primarily from a reduction in corporate expenses and the assumption by Imperial of certain Lorillard operations along with the divested brands.
London-based British American Tobacco (BAT) will maintain its 42% ownership in Reynolds through an investment of approximately $4.7 billion. Reynolds and BAT also have agreed to pursue a technology-sharing initiative to develop and commercialize next-generation tobacco products such as heat-not-burn cigarettes and vapor products.
"This transaction will provide Reynolds with additional resources to invest in innovation, R&D and its operating companies' brands," said Cameron. "This will benefit adult tobacco consumers and wholesale and retail customers alike."
The transactions are subject to customary closing conditions including approval by shareholders of the companies, as well as regulatory approval.
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