Blu e-cigarette deal was crucial to Lorillard takeover -source

Tue Jul 15, 2014 1:04pm EDT

By Jilian Mincer, Anjali Athavaley and Anjuli Davies
    NEW YORK/LONDON, July 15 (Reuters) - Reynolds American Inc
 had no choice but to sell Lorillard Inc's 
top-selling blu electronic cigarettes brand after Britain's
Imperial Tobacco Group Plc insisted it be part of a
wider portfolio of assets it is buying, a source familiar with
the transaction said. 
    The U.S. companies said on Tuesday that they were selling
blu and a group of traditional cigarette brands to Imperial to
ease antitrust concerns about Reynolds' proposed $27.4 billion
acquisition of Lorillard.
    Keeping blu would have given Lorillard and Reynolds more
than 50 percent of the tiny but crucial U.S. e-cigarette market,
further complicating a deal that was already expected to face
heavy antitrust scrutiny.
    "I think the widespread perception is if the deal stood as
it was, it would have been off," said Steve Marascia, director
of research at Capitol Securities Management. 
   
    Imperial will also acquire Reynolds' Kool, Salem and Winston
brands as well as Lorillard's Maverick. But blu was a key
sweetener to bring the British company into the deal, which
would make it a credible third competitor in the U.S. market.
    "It was very important for Imperial in terms of their
competitiveness and their go-forward," Reynolds Chief Executive
Officer Susan Cameron told Reuters.
    Reynolds believed its newer Vuse brand was "superior
technology," she added.
    The source said blu was part of the negotiations. 
    "Imperial said they're only doing this if they get blu,"
said the source. 
    
    VUSE VS. BLU
    E-cigarettes are slim, reusable, metal tube devices
containing nicotine-laced liquids that come in exotic flavors.
When users puff, the nicotine is heated and released as a vapor
containing no tar, unlike conventional cigarette smoke.
    While Vuse's market share is significantly smaller than
blu's 47 percent, Reynolds is the only one of the three largest
U.S. tobacco companies to make its e-cigarettes in its home
turf, at a factory in Kansas. 
    Reynolds executives have said they believe the domestic
production gives them greater oversight and control of the
ingredients and manufacturing of a product that has already
drawn close scrutiny from the U.S. Food and Drug Administration
and other regulators. 
    The company, which started selling Vuse roughly a year ago
in Colorado and Utah, is rolling out the product nationwide this
quarter.
    Reynolds expects to share e-cigarette technology with top
stakeholder British American Tobacco Plc and to
cooperate on next-generation tobacco products such as
heat-not-burn cigarettes and vapor cigarettes, said a company
spokesman.
    "This agreement with BAT holds great promise for global
growth in those categories and will enhance value for all
shareholders," he said.
    Keeping blu would have at least temporarily given Reynolds
and Lorillard, which bought the brand two years ago, a
potentially unbeatable head start in the U.S. e-cigarette
market. 
    That market share has been contracting, however, as Reynolds
and Altria Group Inc rolled out their brands nationwide.
    The e-cigarette category is still evolving, said Morningstar
analyst Philip Gorham. While blu is the market leader now, he
said, "we don't know for sure whether this technology will still
be the leader in five years time or even two."

 (Editing by Lisa Von Ahn)