Could Acquisitions Mean Opportunities for the Tobacco Industry?



Highly concentrated      

As we discussed earlier, the US tobacco industry is highly concentrated Its three leading players accounted for a combined retail (XRT) volume share of 86% in 2014.

The industry’s concentration further increased after Reynolds American (RAI) completed its acquisition of Lorillard and related divestitures to Imperial Tobacco (ITYBY) in July 2015.

Pre-merger, Reynolds and Lorillard were the second- and third-largest US cigarette makers after industry leader Altria Group (MO), which sells the Marlboro brand in the United States. With its acquisition of Lorillard, RAI’s brands broadened their audience.

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Divestiture resulted in market opportunities

Reynolds American’s brand divestitures and other developments in 2015 also resulted in new market opportunities for Vector Group’s (VGR) Liggett.

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

It would have been difficult for any new entrants to counter the anticompetitive effects of the merger in an already concentrated industry, given players such as Philip Morris International (PM) and Japan Tobacco (JAPAF) (JAPAY), who have presences outside the United States.

Rapidly evolving marketplace

British American Tobacco (BTI) signed a vapor products technology-sharing agreement with RAI on December 1, 2015, to efficiently meet the preferences of adult tobacco consumers in a rapidly evolving marketplace.

On September 29, 2015, 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, will accelerate RAI’s growth trajectory and help JAPAF to increase its international portfolio.

PM and RAI together make up 1.4% of the iShares S&P 500 Growth ETF (IVW).[1. Updated as of July 5, 2016]


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