When Smoke Clears, What Will Reynolds-Lorillard Look Like?

Details of deals reveal surprising twists in combined company's focus, strategy

Greg Lindenberg, Editor, CSP

Melissa Vonder Haar, Freelance Writer

Reynolds Lorillard Newport Vuse (CSP Daily News / Convenience Stores / Tobacco)

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.