Point taken: $49 billion, up in smoke
Perhaps like many of you, I start out my day by reading the obituaries in the paper. All jokes aside, it’s that time of life.
Not too long ago, I saw that Larry Bewley had died. Larry was a lobbyist for R.J. Reynolds Tobacco Co. in Raleigh back in the early 1990s when I was covering the N.C. General Assembly. He was a smart guy and an honest guy. I learned from his obit that he had been a college wrestler, which makes sense, as he knew all about balance and leverage. But what sticks with me is that he was the first person in my orbit who had a cellphone that didn’t look like a shoebox. His was small and sleek and looked like the future. It represented technology and power. And of course, when you are representing tobacco, it signaled money. Lots of money.
If you live in Winston-Salem, it’s hard to escape the shadow of R.J. Reynolds, now part of Reynolds American Inc. The former factories have been turned into a spiffy research park, bleached of nearly all references to their nicotine-laced past (“Remaking Winston-Salem,” February). Ditto for the iconic Reynolds Building, now a swanky hotel and apartment complex with a fancy, fussy bistro on the ground floor. Like the amputee who still feels something below the stump, on occasion I wake to the smell of tobacco from days gone by. It is not quite a dream, but something more visceral. A memory packed with the emotion of the past.
In January, just as we were all preparing for the changing of the palace guards in Washington, Reynolds American agreed to be sold to British American Tobacco PLC for $49 billion. If the timing was a surprise, the deal was anything but. BAT has owned 42% of Reynolds since 2004, and its standstill agreement barring it from owning more expired more than two years ago. Over the last five years, Reynolds’ stock has tripled, while BAT’s is up 60%. If your assets aren’t performing or being valued adequately, it is best to find some that are.
Reynolds American owes its success to lots of things, some luck but mostly pluck. And the lion’s share of credit goes to Susan Cameron, the company’s former CEO and current executive chairman. She came to Winston-Salem through Reynolds’ 2004 merger with Brown & Williamson Tobacco Co., which was owned by BAT and created the original 42% stake through a stock swap. She left in 2011, then was called back in 2014 after her successor chose early retirement.
Under Cameron’s watch, Reynolds played both a superb long game and short game to build a better portfolio. It bought smokeless giant Conwood in 2006 for $3.5 billion. It took its time developing vaping technology, absorbing plenty of hits from analysts for its cautious approach but emerging with Vuse, which is the industry leader. She and her team quietly built the Natural American Spirit brand into a huge hippie franchise with a footprint that closely tracks Subaru ownership and Bernie Sanders supporters. (It has a 13.9% market share in Boulder, Colo.) And last year, Reynolds bagged the remaining great prize in the cigarette industry, Lorillard Inc. of Greensboro, paying $25 billion for the right to make and sell Newport, the dominant menthol brand.
Equally important was Cameron’s mercenary approach to Reynolds’ heritage. To make the Lorillard purchase fly, both from a financial and regulatory standpoint, Reynolds sold off a portfolio of sclerotic brands — including Winston and Salem — to Imperial Tobacco Group. Yes, all companies are constantly winnowing their offerings, but it is not every CEO who can divest products named for the city that her company calls home.
Cameron’s mantra at Reynolds has been “Transforming Tobacco,” which is refreshingly honest as an aspiration but slightly Orwellian in practice. While the company has been a leader in products that are “reduced risk,” i.e., providing the nicotine without the smoke or the spit, there’s no getting away from the reality of cash flow. Cigarettes and chewing tobacco provide 98% of sales and 100% of operating profits. The day of reckoning, when the old and new tobacco swap roles, keeps getting pushed back.
Some generations already view cigarette smoking with bemused incredulity, an act of primitive behavior not too dissimilar from driving your own car, having a lawn or even scanning the obit page. But that’s where we’re going, not where we are. Which means that Reynolds and now BAT will wage a two-front battle: First, hedge their bets with technology and use their regulatory clout to steer innovation in their favor, and second, do what they’ve done for the past 50 years, which is manage the decline for all it is worth.