Shares of tobacco giant
are up nearly 50% over the past year, with much of the gains
occurring earlier this year, when rumors of a
started making the rounds. Hearsay became fact last month,
made a cash-and-stock offer for its rival worth some $27.4
A tobacco industry megalith will be formed with the merger of
Reynolds-American and Lorillard.
Because the combination of the two cigarette companies as-is
would create some significant control in certain segments of the
market -- Lorillard's Newport brand alone owns 37% of the menthol
cigarette market; Reynolds has a 24% share -- they've agreed to
Imperial Tobacco Group
Reynolds' Kool and Salem menthol brands, along with a few others,
pave the way
for antitrust approval.
That's still some months off, maybe a year or more, and within
that time frame lies some substantial risk to the gains
Lorillard investors have made, so let's take a look at what might
cause the tobacco company's stock to fall.
The biggest, most obvious potential pitfall is the merger
coming undone. Even with the brand divestiture the two companies
are pursuing to smooth the path to approval, the union will
effectively concentrate some 90% of all tobacco sales into the
hands of two companies: the new Reynolds-American/Lorillard
Not only might the antitrust division of the Justice
Department look askance at such market power being wielded by two
corporate giants, but also anti-smoking groups that would
undoubtedly prefer not seeing the cigarette companies
consolidating and improving their financial condition would
likely decry this concentration of power.
Not that an oligopoly doesn't exist now. And despite the
divestiture actually creating a larger, more effective tobacco
competitor in Imperial, in reality, everyone else is fighting
over crumbs. Altria and the newly merged company will dictate
Emerging e-cigarette market leaves them feeling
One of the smartest maneuvers Lorillard made over the past few
years was its acquisition of blu eCig for $135 million in
2012. The small electronic cigarette brand quickly leapt to the
forefront of an industry that analysts say could eventually
surpass the annual sales of traditional cigarettes. According to
data, blu eCig commanded as much as a 45% share of the market
this past March.
Today, e-cigs represents just 1% of the industry's total
sales, but they continue to expand at triple-digit rates, and
thinks the sector could hit $10 billion in annual sales by
Yet as part of the proposed merger, the tobacco companies have
agreed to sell blu eCig to Imperial as Reynolds has invested a
lot of time and money developing Vuse, its own answer to the
e-cig market leader. By giving up blu, the merged company's
investment would focus on just a single brand that in two test
market states at least, leapt to the forefront. Still, it's
giving up what is clearly already an industry leader.
While that may seem more a problem for the merged company than
Lorillard itself, should the deal fall apart and the cigarette
company continue on independently, it's still going to be facing
a host of new e-cig rivals. Altria got a late start, but it
bought its way in
with the acquisition earlier this year of Green Smoke,
and rolled out nationally its new MarkTen brand in
June. Reynolds likewise began a national campaign for Vuse
at the same time.
The e-cig industry's new leader is smoking the competition.
Source: Logic Smokes.
And according to the latest Nielsen figures, LOGIC
Technology Development catapulted itself into the No. 1
position in the U.S. for unit share in convenience stores
nationwide with a 24.3% share. Lorillard's blu may still
lead in terms of total U.S. dollar share, but now it must
feel Logic breathing down its neck as it has the No. 2 spot with
a 22.9% share.
Maybe not so minty fresh
Just as with the e-cig market, regardless of whether the
merger goes through, there's substantial risk tied to Lorillard's
menthol cigarette brands. Seen as a gateway to luring in new
smokers, with some saying menthol cigarettes target kids, menthol
cigarettes remain a target of antismoking organizations. They
were able to get the FDA to ban flavored cigarettes, but the
regulatory agency held off on banning menthol ones. That might
not be the case going forward.
Gateway drug, or just a smoother smoke? Either way, it's in
the crosshairs of regulators. Source: Wikimedia Commons.
The FDA is proposing new regulations on the smokes; it's found
that although they created no greater health hazards than
regular ones, menthol cigarettes increased the likelihood of
someone starting smoking, deepened their dependence, and made it
harder to quit. Although a judge's ruling last month was a
setback for the agency since he essentially said a "scientific
evaluation" the FDA had included in its proposal
, the agency maintains it's reached the same conclusion
Regardless, the agency could just forge ahead on its own
anyway. Tough new regulations, or, more extreme, banning menthol
cigarettes altogether, could severely limit Lorillard's
competitiveness. Newport is the second-biggest-selling brand
behind Altria's Marlboro, and accounts for 85% of its
total revenues. Merged or alone, Lorillard is going to need
Newport if it wants to thrive.
The immediate future for Lorillard lies with this merger. Its
stock will likely remain in stasis for some time to come until
the antitrust portion of the merger is completed. In that time,
there may be small fluctuations, but I don't see any wild swings
occurring even if the risks mentioned above come to the fore
before then, as the markets will see the merger, if it's
approved, solving many of the issues.
Should the deal fall apart, then you'll see Lorillard's shares
give up many of the gains they have achieved, and those risks
above will play a more important role for the tobacco giant.
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3 Reasons Lorillard Inc.'s Stock Could Fall
originally appeared on Fool.com.
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