Menthol & Antitrust

July 17, 2014

The U.S. is poised to lose a cigarette company. One of America’s largest tobacco companies, Reynolds American, struck a deal to buy rival Lorillard this week. The deal is for $25 billion excluding debt (which adds about $2 billion more) — although the WSJreports it’s so complex it is unlikely to be finalized before next year. If the deal clears antitrust hurdles, Reynolds-Lorillard together would control somewhere between 35 and 40 percent of the American tobacco market.

Americans on average still smoke 1,300 cigarettes per year, says Roberto Ferdman, but tobacco consumption has been on the decline since the 1960s. “Acquiring Lorillard, the U.S. industry’s third-largest competitor, would help Reynolds cope with the slowdown and give it the Newport menthol line, which is popular in urban areas,” writesBloomberg. Susan Cameron, the CEO of Reynolds, told Dealbook after the merger was announced: “This is about Newport and new synergies.”

Supporting that explanation is Reynolds’ willingness to jettison Blu, the U.S.’s most popular e-cigarette, to competitor Imperial Tobacco for $7.1 billion and put all its focus on growing its Vuse-brand e-cigarette (presumably to assuage antitrust regulators). Kool, a menthol brand that competes with Newport, is also being sold to Imperial as part of the deal. Matt Levine notes that the fact that antitrust regulators would take a stance at all seems to be at odds with decades of U.S. public health policy: “All of our other tobacco regulation is about making smoking more expensive, so why should antitrust regulators be working on ways to make it cheaper?”

In part, the acquisition reflects how relatively attractive the U.S. tobacco market has become. Non-U.S. growth and lighter regulation, the driving factor behind Philips Morris’ split from Altria’s U.S.-only business, can no longer be assumed. Philip Morris’ second quarter earnings showed that the only region where the international cigarette company’s volume increased was Asia. Places like Japan and Russia are following the U.S.’s lead in restricting tobacco sales and discouraging use, and sales are falling in even Eastern Europe, traditionally a strong tobacco market.

Domestically, tobacco M&A bankers have efficiently worked themselves out of a job: “this is the last move in the U.S.,” a banker told the WSJ. There just aren’t any more companies left to combine: Altria and the and the new company will together control about 90% of the U.S. cigarette market. Despite creating a duopoly, regulators are likely to approve the deal, says Bloomgerg Businessweek’s Justin Bachman. Bachman argues that the $30 billion in taxes paid annually by the tobacco industry (half to state and local governments, and half to the federal government), give regulators a financial interest in managing the decline of the industry health experts would prefer to see disappear tomorrow. — Shane Ferro and Ben Walsh

On to today’s links:

Oxpeckers
“BuzzFeed headlines actually make fairly small promises and then overdeliver” -Andrew Beaujon

Old Normal
“The bliss of being an unknown cog turned out to be temporary glitch” - Jack Shafer

Educational
The Koch brothers fund “a high school free market and liberty-based course” in public high schools - Joy Resmovits

Transparency
Nestle won’t say how much water its bottling plant is extracting from drought-ridden California - The Desert Sun

Mergers & Awkwardness
Rupert Murdoch tried to buy Time Warner and failed - Andrew Ross Sorkin

Borderline Systemic Importance
“Just because Mr. Fink is talking his book and Ms. White is acting the sycophant doesn’t mean they are wrong” - Jesse Eisinger

Housing
“Wealth of this kind is far more destructive than the alleged sins of the top 1 percent” -Robin Harding

Charts
“Millennials are roughly as likely to own homes as people with similar demographics two decades ago” - Jared Kolko

UGH
In most places in the U.S., bike share can’t keep up with demand because the single bike supplier went bankrupt - Marketplace

Urban Panning
City parking regulations are the worst (Schoolhouse Rock-style!) - Sarah Goodyear

Innovations
Here are some graphics about CEO swearing with no swear words - Bloomberg
“Historically, most controls on swearing have been meant to protect women and children against blasphemy” - Bloomberg

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