Business
4:11 pm
Fri July 11, 2014

Declining Domestic Sales Speed Talks For Tobacco Mega-Merger

Originally published on Sun July 13, 2014 1:03 am

Transcript

MELISSA BLOCK, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block. The U.S. tobacco industry could be in for a shakeup. Reynolds American, the maker of cigarette brands such as Camel and Pall Mall, confirmed today that it's in talks to buy its smaller rival, Lorillard. As NPR's Yuki Noguchi reports, the potential merger comes as the industry feels the pinch of declining sales.

YUKI NOGUCHI, BYLINE: The U.S. tobacco business is still quite profitable, even though the volume of sales of the industry's main product, cigarettes, has been declining for decades. Companies can charge a lot for cigarettes, and that keeps the margins hefty. But the number of cigarettes sold drops about 4 percent a year. And Steve Marascia, director of research at Capitol Securities Management, says the companies are bracing for that decline.

STEVE MARASCIA: Most industries - when you start to have declining sales, then a lot of companies will tend to come up with some type of merger plans, merger acquisitions, in order to offset the declining sales by purchasing another company, getting their revenues and then going into some cost-cutting efforts in order to boost profitability.

NOGUCHI: In addition, he says Lorillard could offer some growth opportunity for Reynolds. Lorillard makes Blue, the market-leading electronic cigarette. And that's a market Reynolds is just now trying to tap.

MARASCIA: The e-cigarette business is going to be very competitive over the next few years. There's a lot of players out there. And it's estimated the market could grow from about $1 billion to $2 billion a year to as much as $20 billion a year in a few years.

NOGUCHI: But the U.S. tobacco market is already very consolidated. Reynolds and Lorillard are currently the number two and three players respectively, behind Altria, the industry leader. If the companies merge, the U.S. tobacco market would largely be controlled by just two companies. And Marascia says that raises some interesting antitrust questions.

MARASCIA: Will the combined companies keep all their assets, or will they have to sell off some of the assets, as has been rumored? And then, secondarily, you want to see what would be the reaction from other companies, such as Altria.

NOGUCHI: Reynolds and Lorillard may have to sell off some brands in order to pass regulatory muster. They're negotiating with the British tobacco company Imperial about buying assets like Winston, Kool and Salem. Michael Lavery is a director of equity research with Credit Agricole Securities. He says although cigarette consumption is falling, the U.S. is still an attractive market for some international companies.

MICHAEL LAVERY: There is certainly relatively attractive dynamics in the U.S. because of the margins and the profits that are involved.

NOGUCHI: Lavery says Imperial is known for competing heavily on price in order to gain market share. So American consumers could see an impact if that company acquires some of the brands that might be up for sale.

LAVERY: They'll see the same brands on offer, generally speaking. There's little change they'll notice, but they might see more competitive pricing from brands that Imperial acquires.

NOGUCHI: The companies declined to discuss ongoing negotiations, adding, there's no guarantee a merger agreement will be reached. Yuki Noguchi. NPR News, Washington. Transcript provided by NPR, Copyright NPR.