Tobacco Companies Reynolds, Lorillard Talk Merger

tobacco merger For the tobacco industry, changes may be on the way, and two big companies may become one giant of a company. The companies responsible for Camel and Newport cigarettes say they are talking about combining two of the oldest and biggest tobacco companies in the country.

A merger between Lorillard Inc and Reynolds American Inc could put the company in a formidable position to rival Altria Group Inc, owner of the number one company Philip Morris USA. It could also mean consolidation across the industry, a shrink in factory and workforce, and spur the prices of cigarettes higher.

New of the merger talks come after months of speculation that it was a possibility. Releasing separate statements, both companies said that they have not reached an agreement and are not guaranteeing that one will be made.

In an investor note, Bonnie Herzog, a Wells Fargo Securities analyst, said that a merger could be “very positive for the global tobacco industry and could be just the beginning of future transactions.”

Speculation about consolidation in the tobacco industry has come as the demands for cigarettes is falling after an increase in taxes, social stigma, smoking bans, and health concerns. U.S. cigarette sales fell last year by 2.6% to 285 billion cigarettes. This information from Euromonitor International.

But so far, the tobacco industry has kept itself profitable by raising prices and cutting operating costs and a combined company could make cost cutting measures easier.

Cowen analyst, Vivien Azer, said to The Associated Press, “If you take a look back historically, the way to drive margins in the U.S. tobacco industry has been through consolidation.”

The next step to increase demand for tobacco companies will be more focus on cigarette alternatives like smokeless tobacco, electronic cigarettes, and cigars.

Reynolds produces Pall Mall, Camel, and Natural American Spirit cigarette brands and the Kodiak and Grizzly smokeless tobacco. It currently holds approximately 27% of the U.S. cigarette market. The company also expanded its electronic cigarette brand, Vuse, last month. Reynolds’ profit rose to $1.72 billion on revenue of $8.2 billion, a 35% increase, last year.

Lorillard has existed since before the Revolutionary War and is the oldest continuously operating tobacco company in the U.S. The company holds about 15% of the market, which was boosted with its Newport cigarette brand. That brand alone holds 37.5% of the market for menthol cigarettes.

It was also the first tobacco company to step into the e-cig market when it launch the Blu brand in 2012. Blu is not responsible for nearly half of all e-cigarettes sold in the U.S. Lorillard’s profit rose to $1.9 billion last year with revenue of $4.97 billion, an 8.5% increase.

A merger deal would likely mean consolidation of the companies’ staff and operations. Reynolds has 5,200 full time employees and has a 2 million square foot plant in Tobaccoville, North Carolina. Lorillard has 2,900 employees and produces in a plant in Greensboro, North Carolina.

Any merger could push cigarette prices even higher as it eases competition, even though the companies might shed its smaller brands to ease concern over competition. But selling small brand may not be enough as the combined company would be so dominant that it may need to sell a bigger brand as well.

Azer said on this point, “The likelihood of a deal closing in the structure that we think these companies are envisioning is highly unlikely. If you look at the implications of selling all the tail brand even, it doesn’t really change the math. You have to sell Camel.”

The combined company would hold half of the cigarette market with its Marlboro brand, Black & Mild cigars, Skoal, Copenhagen and the MarkTen e-cigarette brand.

A deal would also likely include British American Tobacco PLC, which markets Kent and Dunhill cigarettes internationally. British American has a 42% stake in Reynolds and a moratorium preventing the company from increasing that stake expires at the end of this month. Reynolds confirmed on Friday that British American is involved in the merger talks and is expected to maintain its current stake and support the merger.

Meanwhile, Imperial Tobacco Group PLC said on Friday that it has been in talks to buy some of the tobacco brands if a merger should occur.

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