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Japan Tobacco Confirms Acquisition of Santa Fe Assets

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Santa Fe, Reynolds American’s subsidiary

Reynolds American’s (RAI) subsidiary Santa Fe manufactures and markets super-premium cigarettes and other tobacco products under the name Natural American Spirit. Santa Fe’s revenue for 2014 rose 15% to $0.66 billion compared to $0.57 billion in 2013.

Santa Fe contributes 7.8% to Reynolds American’s total revenue. Japan Tobacco’s (JAPAY) (JAPAF) revenue for fiscal 2015 is expected to be 2.35 billion yen, or $19.6 billion, according to JAPAF estimates.

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The FDA’s letter to Santa Fe

Santa Fe’s products are priced higher than other cigarette brands like Lucky Strike by British American Tobacco (BTI). This is because it uses natural additive-free tobacco, including styles made with organic tobacco.

However, on August 27, 2015, the FDA (U.S. Food and Drug Association) sent a letter to Santa Fe stating that the company needs to prove cigarettes they’ve labeled as “natural” or “additive-free” are less harmful in order to keep marketing them that way. However, in a September 15 statement, RAI said it disagreed with the FDA ruling on its four cigarette brands and conveyed that the equivalent applications fully satisfied the guidance the agency provided.

Peer comparison

Other tobacco companies such as Vector Group (VGR) and Altria Group (MO) don’t produce additive-free tobacco cigarettes. However, Philip Morris International (PM), in an attempt to meet demand for innovative products, produces reduced-risk tobacco products (or RRPs). To learn more about Philip Morris’s reduced-risk products, please read Philip Morris’s New Innovative Products in the Reduced-Risk Tobacco Market.

Beneficial to both JAPAF and RAI

JAPAF, strengthened by sizable cash and cash equivalents worth 343.6 billion yen, or $2.9 billion, plans to continue its overseas growth to offset shrinking demand in Japan. This investment will underpin its sustainable long-term profit growth in this highly competitive market. The existing operations of the acquired companies are expected to remain unchanged.

RAI will retain Santa Fe’s rights to the US market. Selling the international trademark to JAPAF, which has an established global retail (XRT) infrastructure, is more advantageous to RAI in terms of supporting Natural American Spirit’s growth potential. This will add value for RAI’s shareholders.

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