Acquisitions are Increasing the Tobacco Industry’s Concentration


Dec. 21 2015, Updated 1:06 p.m. ET

Highly concentrated tobacco industry

As we discussed earlier, the US tobacco industry is highly concentrated. The industry concentration increased further after Reynolds American (RAI) completed its acquisition of Lorillard and related divestitures to Imperial Tobacco (ITYBY). After the acquisition, RAI’s portfolio included Newport, which helped RAI in boosting its 3Q15 sales.

Pre-merger, Reynolds American and Lorillard were the second- and third-largest US cigarette makers behind industry leader Altria Group Inc. (MO), which sells the Marlboro brand in the US. With the acquisition of Lorillard, RAI’s brands together broadened customer reach with their combined portfolios.

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Divestiture complaint

According to the FTC (Federal Trade Commission) complaint, without the divestitures to ITYBY, the proposed merger would have raised significant competitive concerns by eliminating current and emergent, head-to-head competition between Reynolds and Lorillard in the US market for traditional combustible cigarettes.

Without the divestiture to Imperial Tobacco, Imperial may have become too weak to provide real competition. Also, it would have been difficult for any new entrant to counter the anticompetitive effects of the merger in an already concentrated industry with players like Philip Morris International (PM) and Japan Tobacco Inc. (JAPAF), both of which have a presence outside the US.

International assets acquisition

On September 29, Japan Tobacco bought Natural American Spirit’s international assets from Reynolds American in an all-cash transaction valued at ~$5 billion. Santa Fe’s Natural American Spirit, backed by Japan Tobacco Group’s international distribution, sales force, and manufacturing facilities, should accelerate RAI’s growth trajectory and help JAPAF to increase its international portfolio.

In 2014, Altria Group Inc.’s (MO) Nu Mark also acquired the e-vapor business of Green Smoke Inc. and affiliates for $0.1 billion to boost sales.

PM and RAI together have exposure in the iShares Russell 1000 ETF (IWB) with 0.7% and 0.2%,[1. Updated as of December 3, 2015] respectively, of the total weight of the portfolio.


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