Buying a brand

 

Cigarette consumption in this country has declined by a third in just 15 years, but so many Newports roll off the assembly line at Lorillard Inc.’s Greensboro factory that Reynolds American Inc. couldn’t resist what it thinks will be a good nicotine fit. It’s acquiring Lorillard in a $25 billion deal that, in essence, boils down to buying Newport, by far the nation’s most popular brand of menthol cigarettes. Though it might take regulators nearly a year to sort through the complex transaction, the nation’s No. 2 tobacco company, by buying No. 3, bulks up to compete with No. 1 — Richmond, Va.-based Altria Group Inc.’s Philip Morris USA. Just as Marlboro makes up more than 80% of Philip Morris’ sales, Newport rings up almost 90% of Lorillard’s. In the last decade, the brand’s share of domestic cigarette sales has increased to 12% from 8%, and it commands a whopping 43% of the menthol market. Newport long ago passed Reynolds’ Salem brand, introduced in 1956 as the first filter-tipped menthol cigarette. With Americans spending $90 billion a year on cigarettes, Newport’s revenue alone exceeds that of Coca-Cola classic and many other grocery and convenience-store staples, Shane MacGuill, a tobacco analyst at Euromonitor International Ltd. in London, says in a report on the deal, which was announced July 15. Given Newport’s dominance, the transaction ensures renewed focus on anti-smoking groups’ efforts to ban menthol, an organic compound used to flavor cigarettes that some say makes them more enticing to new smokers. Though menthol brands make up only a third of U.S. cigarette sales, they’re preferred by 80% of black smokers, says Delmonte Jefferson, executive director of the Durham-based National African American Tobacco Prevention Network. “The only reason to buy Lorillard,” he says, “is to acquire Newport, which really resonates with African-Americans.” He claims the brand targets minority and low-income consumers, a view Lorillard rejects. Foes’ hopes rose in 2011 when a U.S. Food and Drug Administration advisory panel suggested that removing menthol “would benefit public health,” but no action has followed as the FDA studies the matter. No nation has banned the substance, and Newports are “not more dangerous than nonmenthol cigarettes,” according to a Lorillard website addressing the issue.Bristol, U.K.-based Imperial Tobacco Group PLC is buying Lorillard’s plants in Greensboro and Danville, Va., which employ about 2,900, along with its blu eCigs and Reynolds’ Kool, Salem and Winston brands. Imperial’s $7 billion investment is considered essential for regulators to approve the deal. Otherwise, Reynolds and Philip Morris would control 85% of U.S. cigarette sales. With Martin Orlowsky, a former Lorillard CEO who played a major role in Newport’s growth, leading Imperial’s expanded U.S. business — he’s executive chairman designate — the Greensboro factory appears in good hands. “He is perhaps the strongest U.S. tobacco operating executive of his generation,” Morgan Stanley analyst David Adelman says.