Big changes in store for global tobacco players

After several months of talks it seems that the deal for US tobacco giant Reynolds to buy fellow tobacco company Lorillard is on the verge of going through in a $56 billion combination. Reynolds is the number two player in the US, whilst Lorillard is third. The owner of Marlboro cigarettes Altria is number one with over half the market.

Imperial Tobacco rose on the news that it was negotiating to pick up some of the brands which would need to be divested to meet competition concerns in the United States which will boost the company’s presence from its current 3% market share. Fellow London Stock Exchange listed company British American Tobacco which owns 42% of Reynolds after a deal to divest its American Tobacco business Brown and Williamson (famously featured in the Russell Crowe movie – “The Insider”) in the 1990’s has pledged to maintain its share in the new combined entity meaning that BAT will be investing in the transaction. BAT sold its business after the deal with 46 US state Attorney Generals with the so called Tobacco Master Settlement agreement in 1998 to settle tobacco litigation with four of the largest US tobacco companies agreeing to pay a minimum of $206 billion over the first twenty-five years of the agreement

Given many income and pension funds own Imperial and BAT in the UK because of their chunky dividend yields this is a major deal for all parties, with Imperial likely to have to stump up at least $7 billion to buy the divested brands and production facilities. For Imperial its good news given its reliance on the fast declining Western European tobacco market with an opportunity to strengthen its hand in the $90 billion American tobacco market which is dropping value by around 3% a year but has high profit margins.

It leaves Japan Tobacco (JTI) and Philip Morris International as the other big global tobacco players, with the latter selling Marlboro outside of Altria’s market in the United States. JTI has little or no presence in the American market and some are now speculating that it could make some acquisitions after this latest Lorillard deal should it happen which is looking likely right now.

Contrarian Investor UK

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