The number 2 U.S. tobacco manufacturer Reynolds American Inc Parent company of R.J. Reynolds Tobacco Company (RJRT) has been making headlines recently on two separate fronts. The first concerns the ownership status of the company itself, since its top shareholder, with a 42% stake, is British American Tobacco Ltd. Some analysts claim that BAT is considering to attempt to increase its stake in Reynolds and acquire majority control. Such a move will be possible after 30 July 2014, when a 10-year stock-buying moratorium which was included in the initial deal between the two tobacco companies is due to expire. BAT is known for having a lot of minority stakes in many companies around the world and for its willingness to consider its options for further investments. BAT’s CEO Nicandro Durante mentioned during the company’s annual shareholders’ meeting, where its first quarter results for 2014 were also announced (link to other story) that “we’d never go to Reynolds with a hostile takeover.” According to some analysts, if BAT were to make the move and acquire the majority stake in Reynolds, then Reynolds would operate as a U.S. subsidiary of BAT with the impact on local jobs being minimal.
The second front on which Reynolds is making headlines is its rumored interest in buying rival Lorillard Inc. of Greensboro, which is currently the number 3 U.S. tobacco manufacturer. Indeed these rumors have been circulated for some time and in fact they had culminated back in 2008. However then deal was not concluded back then and it is uncertain whether it will do so now, as the matter is quite complicated. Some mention the fact that such a move by Reynolds, i.e. pursuing an offer for Lorillard will require the prior granting of BAT’s permission, although BAT is rumoured to be willing to finance such a move by Reynolds.
Moreover, the combination of the number 2 and the number 3 U.S tobacco manufacturers will have to be allowed by the competent antitrust authority FTC. The Federal Trade Commission would only allow the deal to go through if Reynolds first sells off some of its existing menthol brands such as Kool and Salem, because if it takes over Lorillard it would then acquire Newport, which currently holds a 37% market share in the menthol cigarettes. Combined with Reynolds’ menthol styles of Camel and Pall Mall and its other menthol brands, the new venture would have an unacceptably high, for healthy competition reasons, menthol market share of 67%. Therefore the sell off of some brands to a manufacturer who could become a competitive number in the U.S. market appears the only feasible way for the deal to go through and get the green light from the authorities.