Newport cigarettes will let Reynolds pursue menthol strategy

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The R.J. Reynolds Building has served as downtown Winston-Salem's architectural signature for 85 years.

WINSTON-SALEM, N.C. — Reynolds American Inc. is going all in on menthol cigarettes with its planned acquisition of Newport even as it leads the charge for innovative smokeless products and rolls out nationally its electronic cigarette Vuse, according to the Winston-Salem Journal.

Newport, with its 37.4 percent menthol market share and 13 percent overall market share, is the real prize for Reynolds in its proposed $27.4 billion purchase of Lorillard Inc., which was announced Tuesday.

It could take up to a year for federal regulators to decide whether to approve the deal. Susan Cameron, Reynolds’ chief executive and president, said officials will begin integration planning by mid-August.

Lorillard owns 40 percent of the menthol market share and Reynolds holds 24 percent. Philip Morris USA has 26 percent of the market.

Reynolds’ agreement to sell its top two menthol brands, Kool and Salem, to Imperial Tobacco Group PLC would shrink Reynolds’ menthol market share with Newport to 56 percent, while boosting Imperial’s to 11 percent.

The menthol strategy may appear risky given the industry has waited several years for the Food and Drug Administration to determine whether it will tighten regulations on menthol cigarette flavorings if not ban it, as some anti-tobacco groups have demanded.

However, Cameron says she believes the FDA will not clamp down severely on menthol, and that the revenue Newport generates would help strengthen the company’s finances and pay for future product innovations. Having Newport also would help Reynolds better balance its revenue if e-cig sales exceed traditional cigarettes as some analysts predict could happen as early as 2021.

She cited again Tuesday her confidence in the FDA’s “commitment to science-based regulation, coupled with a transparent rule-making process which will allow us to manage menthol regulation over time.”

“We agree with the FDA that menthol in cigarettes is not associated with an increase in disease risk to the user compared to nonmenthol cigarettes.”

Cameron is touting not only Vuse in terms of innovation, but also a “heat-not-burn” technology that heats real tobacco leaf, which may appeal more to a traditional cigarette smoker and make its three main brands more viable longer.

What makes Newport worth the financial and regulatory risk are annual sales of more than $10 billion, as well as a strong presence in the Northeast that would bolster Reynolds’ slimmer presence in those markets.

“It’s hard to find another consumer brand that can top that kind (30 years) of consistent success story,” said Murray Kessler, Lorillard’s chairman, chief executive and president. Kessler would join the Reynolds board with the deal.

Bonnie Herzog, an analyst for Wells Fargo Securities, said that although additional FDA regulations could affect Reynolds’ ability to market Newport and Camel’s menthol styles, she said she does not believe the FDA would ban menthol flavorings.

Part of that reasoning comes from how much federal and state governments depend on cigarette excise taxes and how much 46 states depend on the landmark Master Settlement Agreement, which requires manufacturers to make payments to help the states recover smoking-related health care costs.

The states agreed to not pursue further legal action against the manufacturers. The companies agreed to pay about $206 billion over more than 20 years, with state payments based mostly on their populations.

Scott Ballin, past chairman of the Coalition on Smoking or Health, said Reynolds’ potential takeover of Newport could spur some public-health advocates to “use this merger as a means of calling on the FDA to move quickly to ban menthol.”

“It may put pressure on FDA, but I would guess that FDA won’t move until they have dotted all the i’s and crossed all the t’s. There has always been a feeling that lawsuits will be filed.”

Matt Myers, president of the Campaign for Tobacco-Free Kids, expressed his concern that Reynolds would own three brands — Camel, Newport and the Grizzly moist snuff — that his group says are popular choices among underage smokers.

He cites as proof a 2012 study by the federal Substance and Mental Health Services Administration in which it determined that Newport and Camel cigarettes are used most often by about 1 million of the 2.7 million youths who smoke. He pointed out Newport’s popularity with black smokers — a 73.6 percent market share — due in part of heightened marketing in black communities.

“Regulators must be on guard to ensure not only that the proposed merger complies with antitrust laws, but also that it does not increase the power of these companies to market to kids or otherwise harm public health,” Myers said.