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Tobacco firms Reynolds, Lorillard in merger talks

Published on NewsOK Modified: July 11, 2014 at 12:39 pm •  Published: July 11, 2014
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RICHMOND, Va. (AP) — Big Tobacco may soon get smaller.

The makers of Camel and Newport cigarettes said Friday they are in talks to combine two of the nation's oldest and biggest tobacco companies. A deal between Reynolds American Inc. and Lorillard Inc. would create a formidable No. 2 to rival Altria Group Inc., owner of Philip Morris USA. It also could spur a wave of consolidation in the tobacco business, shrink factories and workforces, and push prices for cigarettes higher even as smokers buy fewer of them.

The news follows months of speculation about the possible combination. In separate statements, the companies said no agreement has been reached and there's no guarantee one will be.

The merger would be "very positive for the global tobacco industry and could be just the beginning of future transactions," Wells Fargo Securities analyst Bonnie Herzog wrote in an investor note.

That's partly because demand for traditional cigarettes is falling in the face of tax increases, smoking bans, health concerns and social stigma. U.S. cigarette sales fell about 2.6 percent last year to 285 billion cigarettes, according to market researcher Euromonitor International.

But raising prices and cutting business costs has kept the industry handsomely and reliably profitable. The companies also have cut costs to keep profits up, and the larger scale of a combined company could make future cost-cutting easier.

"If you take a look back historically, the way to drive margins in the U.S. tobacco industry has been through consolidation," Cowen analyst Vivien Azer said in an interview with The Associated Press, adding that the improvement in profitability would come from cost-cutting in the near-term and manufacturing consolidations down the road.

The next step for tobacco companies is an increased focus on cigarette alternatives — such as electronic cigarettes, cigars and smokeless tobacco — for sales growth.

Reynolds markets Camel, Pall Mall and Natural American Spirit cigarettes, as well as the Grizzly and Kodiak smokeless tobacco brands. It has about 27 percent of the U.S. retail cigarette market. Reynolds, which is based in Winston-Salem, North Carolina, also expanded its Vuse brand electronic cigarette nationally last month.

Reynolds' profit rose 35 percent to $1.72 billion last year on revenue of $8.24 billion, excluding excise taxes.

Lorillard, which was founded before the Revolutionary War and is the oldest continuously operating U.S. tobacco company, was spun off from Loews Corp. in 2008. The Greensboro, North Carolina-based company has about 15 percent of the retail market, bolstered by its flagship Newport cigarette brand, which commands 37.5 percent of the menthol cigarette market.

Lorillard because the first major tobacco company to jump into the e-cigarette market when it acquired the Blu e-cigarette brand in 2012. Blu now accounts for almost half of all e-cigarettes sold. Lorillard's profit rose 8.5 percent to $1.19 billion last year on revenue of $4.97 billion, excluding excise taxes.

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