NEW YORK -- After months of suggesting both Philip Morris USA and R.J.Reynolds tobacco companies were going to enter the smokeless-tobacco category with new, original products in the first half of this year, a tobacco stock analyst has changed her tune and is now speculating that one of the two companies will likely purchase Conwood Sales Co., makers of the Kodiak and Grizzly brands of moist smokeless tobacco, among other products.
We anticipate that PM USA and Reynolds will be the two main bidders for Conwood, though, offering fewer synergies, we [image-nocss] do not discount the possibility of Lorillard at least looking at the company, Citigroup analyst Bonnie Herzog wrote in an industry note titled A Race to Acquire Conwood.
Herzog outlined several benefits of acquiring Conwood for one of the major cigarette
Manufacturers, including:
Market share. A quick market-share grab of roughly 25% share would catapult the buyer to a solid No. 2 player in the smokeless industry, leaving the other potential cigarette manufacturers at a disadvantage.
Synergy opportunities. The opportunity to generate significant cost savings and synergies by consolidating the two companies. A Conwood acquisition could lead to earnings accretion almost immediately for either PM USA or Reynolds.
Maintain consumer base. One of the cigarette manufactures would now have products with national distribution within the smokeless tobacco category to potentially capture transitional smokers going into smokeless and the increasing dual users.
More control of deep discount segment. By purchasing the No. 1 growing sub-price value brand (Grizzly), the acquirer could have the ability to control the pricing of the deep discount segment, which has been causing down-trading pressure from the premium brands.
Acquiring talent and product knowledge. By acquiring Conwood's knowledgeable smokeless tobacco sales force, this presents less of an education hurdle. Furthermore, by acquiring Conwood, Philip Morris or Reynolds would obtain the smokeless tobacco technology, equipment, tobacco, etc. immediately.
While Herzog acknowledges her comments in the note are mostly speculation, others including Nik Modi, senior tobacco analyst for UBS Research have suggested it is likely one of the big cigarette companies will buy their way into the smokeless tobacco category. What has surprised speculators, however, is Herzog's suggestion that the acquired company might be Conwood.
I initially thought only USST [United States Smokeless Tobacco Co.] would be an acquisition target, because cigarette companies would only be looking to purchase brands that are No. 1 or No. 2 in their categories, an official from another tobacco company told CSP Daily News. Since then, I have reversed course and would not be surprised at all at a purchase of a smaller smokeless company.
The tobacco executive said Conwood would make an ideal purchase because the company, which is currently owned by the Pritzker family, is growing the fastest. USST has been losing huge amounts of can share, he said. It has been so big that I think they would not be a target. Besides, the vision for a cigarette company would not be to be the biggest traditional snuff manufacturer but to lead the smokeless category into the holy land of smoker's alternatives.
Both PM USA and RJR offered no comment to CSP Daily News' queries about a possible purchase. Both also balked at speculation that they planned to enter the smokeless tobacco category at all.
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