UPDATE 1-Imperial Tobacco to snag U.S. e-cig lead thanks to deal

Tue Jul 15, 2014 5:24pm EDT

(recasts first paragraph, adds details on e-cigs)
    By Jilian Mincer, Martinne Geller and Anjuli Davies
    NEW YORK/LONDON, July 15 (Reuters) - When Imperial Tobacco
Group Plc agreed Tuesday to buy a group of brands from
Reynolds American Inc and Lorillard Inc as part
of their merger, the British company insisted the assets include
Lorillard's blu e-cigarette unit.
    The brand gives Imperial, which will become the
third-largest U.S. tobacco company overall, a big lead in the
new and fast-growing U.S. electronic cigarette market where it
now accounts for about 47 percent of market share. 
   E-cigarettes are considered a crucial business for big
tobacco companies, which have bought or developed their own
brands in recent years to offset shrinking sales of conventional
tobacco cigarettes. 
    Imperial, which already had an e-cigarette product called
Puritane, hopes to build on blu's strong U.S. foothold
worldwide, said Chief Executive Alison Cooper.
    "When it comes to e-cigarettes, outside of the U.S. you
haven't got strong brands," said Cooper. "The opportunity is to
start getting the technology right with a great brand.
    "We do think it's a great brand," she said. "The overall
portfolio is what we're pleased to have bought. It's really the
whole package."
    One source close to the deal talks said Imperial insisted
that blu be part of the wider package of brands it was buying.
Imperial will also acquire Reynolds' Kool, Salem and Winston
brands as well as Lorillard's Maverick. 
    U.S. e-cigarette sales are expected to outpace sales of
tobacco cigarettes by 2020, according to Wells Fargo analyst
Bonnie Herzog, who said Tuesday's deal has the potential to
catapult the global vapor category, "which could be increasingly
M&A-driven."
    After decades of implementing cigarette bans and encouraging
people not to smoke, "I think these (electronic-cigarette)
products renormalize smoking as a behavior," said Doug Blanke,
director of Public Health Law Center, at the William Mitchell
College of Law. 
    Imperial, however, should expect intense competition from
Reynolds, Altria Group Inc and some of the smaller
private companies in the business, including NJOY, Mistic and
VMR Products.  
    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."
    
   
    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.
    Lorillard purchased blu for $135 million in 2012. Since then
its U.S. market share has soared from 10 percent to about 47
percent and revenue has quadrupled to more than $200 million.
    Many attribute the growth to the savvy marketing of its
founder Jason Healy, who built its rebellious image with slogans
such as "Take Back Your Freedom," bikini ads in Sports
Illustrated and sponsorship of concerts and car races.
    Blu - unlike Vuse and MarkTen - also offers fruit-flavored
e-cigarettes including Pina Colada, Peach Schnapps and Cherry 
Crush. 
    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, 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.

    
    
    

 (Additional reporting by Anjali Athavaley; Editing by Lisa Von
Ahn and Prudence Crowther)