RPT-Fitch: Altria Green Smoke Buy Highlights Industry e-Cig Interest

Wed Feb 5, 2014 9:32am EST

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Feb 5 (Reuters) - (The following statement was released by the rating agency)

E-cigarettes provide tobacco companies with a compelling source of diversification and the potential to reverse secular declines over the long term, Fitch Ratings says. Altria's recently announced acquisition of E-cigarette company Green Smoke highlights the industry's commitment to this promising product category.

Altria Tuesday said its Nu Mark LLC subsidiary would acquire Green Smoke Inc.'s E-vapor business for approximately $110 million in a transaction expected to close during the second quarter. Green Smoke's offering is differentiated from NuMark's MarkTen E-cigarette brand by in the vapor itself, which is delivered in a higher volume. Green Smoke has limited distribution capability as its products are mainly sold via the Internet. Altria's much larger retail channel can now offer an E-cigarette portfolio combining the relatively new MarkTen brand with the highly rated Green Smoke products.

The entrance of large tobacco companies has legitimized the E-cigarette marketplace. Lorillard, the first major tobacco company to jump into the space with the purchase of blu eCigs in April 2012, has since committed to rapidly expanding the number of retail outlets for the blu brand. British American Tobacco acquired Ltd in 2012. Shortly thereafter, Altria and Reynolds American introduced their MarkTen and Vuse e-cigarette brands, respectively.

Growth prospects for the E-cigarette industry are compelling, with sales estimates for the U.S. marketplace reaching $1.5 billion in 2013, compared to less than $10 million in 2007. Demand has essentially doubled every year since the introduction of the vapor products in late 2006 in the US, which is the world's largest E-cigarette marketplace. The vast majority of this demand is derived from current tobacco smokers.

The consistent, rapid growth of the industry has led to predictions that E-cigarette sales will overtake those generated by tobacco cigarettes within the next decade. Today, the size of the E-cigarette category pales in comparison to that of the overall tobacco industry, estimated at $697 billion in global retail value in 2012 by Euromonitor international.

While promising, growth via the nascent E-cigarette product category could be stifled under potentially strict government regulation. The U.S. Food and Drug Administration (FDA) may soon regulate E-cigarettes, which are currently unregulated as either a tobacco product or a smoking cessation medical device. The FDA wants to address concerns regarding the safety and efficacy of the vapor cigarettes as well as the potential influence of their use on youth smoking initiation.

For more information on this topic, please see our special report titled, "E-Cigarettes: A Glowing Marketplace," available on our Website www.fitchratings.com

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