Tobacco

Reynolds-Lorillard Deal Could Hinge on Newport

Retailers anticipate Every Day Low Price program positioning to be a deciding factor

NEW YORK -- An "overwhelming" 98% of retailers expect the Federal Trade Commission (FTC) to approve the pending $25-billion Reynolds American-Lorillard merger deal, with some retailers expecting minor modifications or additional brand divestitures, according to the latest Wells Fargo Securities LLC "Tobacco Talk" survey, representing nearly 40,000 U.S. convenience stores.

Lorillard Newport Reynolds cigarettes tobacco (CSP Daily News / Convenie cne Stores / Gas Stations)

One of those modifications could be positioning Lorillard's Newport menthol brand as part of Reynolds' Every Day Low Price (EDLP) retailer program.

The companies first announced the deal in mid-July.

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.

Reynolds also 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 to head off regulatory concerns about competition.

Some believe it will be challenging for Imperial to maintain share--whether Imperial and some of the smaller manufacturers will be able to effectively compete.

"Despite this hurdle, we believe [Reynolds] and [Lorillard's] agreement to extend the normal 30-day waiting period should be viewed as positive and could suggest negotiations are progressing towards ultimate FTC approval of the deal "as-is" or with very minor modifications to ensure Imperial will have a "fighting chance," wrote Bonnie Herzog, managing director of tobacco, beverage and convenience-store research at New York City-based Wells Fargo Securities in a research note.

"We believe one key consideration by the FTC is Reynolds' Every Day Low Price (EDLP) retailer program and how it may or may not create shelf space constraints for Imperial. The majority of our retailer contacts do not expect the FTC to require changes to Reynolds' EDLP for the deal to be approved and expect Newport's growth will accelerate if added to this program."

Most retailers responding to the survey (about 85%) said they believe Reynolds' EDLP program will make it more difficult for Imperial to compete; however, nearly 70% of the retailers believe the FTC will not require changes to EDLP in order for the deal to go through. Most retailers (nearly 60%) believe Reynolds will add Newport to its EDLP program; and more than half of retailers believe EDLP participation will increase if Newport is added and that Newport being added to EDLP could be unfavorable to Imperial.

More than 65% of retailers believe Newport will grow faster if added to Reynolds' EDLP.

Survey respondents believe that Reynolds will leverage Newport to grow its EDLP program, up from the about 60% retailer participation currently.

"This would enable Reynolds to more tightly control/manage its growth brand pricing structure, ultimately driving greater market share and profitability overall and importantly accelerate growth for Newport according to 65% of our retailer contacts," said Herzog. "Therefore, if Reynolds includes Newport in its EDLP program, retailers should have a greater incentive to join, although some feel they may have 'no choice' given the importance of Newport despite this program being voluntary. Regardless, if Reynolds chooses not to include Newport in its EDLP, or is potentially restricted from doing so, we believe Reynolds' superior execution at retail will enable it to drive faster share gains for Newport."

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