RICHMOND, Va. — Joe Camel is bulking up to take on the Marlboro Man.
Camel cigarette maker Reynolds American Inc.’s $25 billion deal to buy Newport maker Lorillard Inc. creates a formidable No. 2 tobacco company in the U.S. behind Marlboro maker Altria. It also creates a powerhouse in menthol cigarettes, which are becoming a bigger part of the business and gives the combined company some breathing room even as people smoke fewer cigarettes every year.
The deal announced Tuesday also creates a new major player in the country’s tobacco market, the U.K.’s Imperial Tobacco, which is buying some of the companies’ other brands including Kool and Winston and instantly becomes the king of e-cigarettes in the U.S.
The deal also is an indication that Reynolds sees electronic cigarettes as a promising side business but not the whole future. To get the acquisition done, Reynolds is ceding a commanding lead in the e-cigarette business by selling off Lorillard’s dominant Blu e-cig brand to Imperial.
Reynolds and Lorillard value the deal at about $27 billion. It is expected to close in the first half of 2015 but will likely face regulatory scrutiny. Lorillard shareholders would receive $50.50 in cash for each share and 0.2909 of a share in Reynolds stock at closing, a combination valued by the companies at $68.88 per share.
After the deal, the company, which will remain based in Winston-Salem, North Carolina, is projected to have more than $11 billion in revenue.
To help to ease regulatory concerns about competition, Imperial Tobacco Group will buy the Kool, Salem, Winston, Maverick and Blu e-cig brands for $7.1 billion, tripling its share of the U.S. cigarette market. Imperial already owns Florida-based Commonwealth-Altadis Inc., maker of USA Gold cigarettes.
Reynolds will keep its Camel, Pall Mall and Natural American Spirit brands and acquire Lorillard’s flagship Newport brand, giving it 34 percent share of the U.S. retail cigarette market.
Newport and Camel are two of the largest menthol players. On its own, Newport accounts for 37 percent of the menthol segment. While people are smoking less, buying 19 percent fewer cigarettes overall in 2013 than five years earlier, menthol cigarette sales have fallen by only 7 percent and its share of the market grew 4 percentage points to about 31 percent, according to Euromonitor International.
“Cigarette volume in this country has been declining for a very, very long time, but … it’s important as we see consolidation and growth in market share, to have a true portfolio of iconic brands,” Reynolds CEO Susan Cameron told The Associated Press.
Reynolds will focus on expanding its rechargeable Vuse e-cigarette brand.
But the menthol and e-cigarette markets aren’t a sure bet. Both face the possibility of heavier regulation.
The Food and Drug Administration is weighing restrictions on the minty smokes after a review concluded they likely pose a greater health risk than regular cigarettes because younger people are more likely to start using them and that menthol smokers have a harder time quitting. The FDA also has proposed regulating battery-powered e-cigarettes.
Reynolds expects to save about $800 million a year in costs.
The net effect in tobacco country is uncertain. Reynolds, which has about 5,200 full-time employees and produces its cigarettes at its huge Tobaccoville, North Carolina, plant, said it plans to hire over 18 months following the closing. Imperial is buying Lorillard’s manufacturing and offices in Greensboro, North Carolina, along with about 2,900 employees.
The combined company will challenge Altria Group Inc., owner of Philip Morris USA, which holds about half of the retail cigarette market.
Lorillard’s stock fell $5.47, or about 8 percent, to $61.75 Tuesday. Reynolds’ stock fell $3.27, or about 5 percent, to $59.91.