| NEW YORK, July 12
NEW YORK, July 12 The enduring popularity of
menthol may be a big motivator behind Reynolds American Inc's
interest in buying smaller rival Lorillard Inc,
which has the best-selling U.S. cigarette brand with the
While potential cost savings from economies of scale in a
declining industry may be the main driver for the
multi-billion-dollar deal, Lorillard's leading U.S. menthol
cigarette Newport is another key draw.
Menthol cigarettes have roughly a 28 percent market share in
the United States, according to market research firm Euromonitor
International. Experts say the mint-flavored additive enjoys
disproportionate popularity among minorities, especially
African-Americans, and young people.
Reynolds is in talks to acquire Lorillard, which has a
market capitalization of $22.9 billion, in a deal that would
reshape one of the world's most profitable tobacco markets.
Adding Newport to its product lineup would allow Reynolds,
maker of Camel cigarettes, to broaden its reach among minority
and younger smokers.
Menthol may reduce the irritation and harshness of smoking
when used in cigarettes, according to the U.S. Food and Drug
Administration. The category is declining but at a slower rate
than nonmenthol cigarettes. According to a report by Cowen &
Co., menthol sales volumes have fallen at 2 percent annually for
the last 10 years compared to a 4 percent decline for nonmenthol
Still, menthols face risks as the FDA considers restrictions
on the substance, which is regulated in medical products but not
in cigarettes. The agency last year released a preliminary
review that said that a majority of African-American smokers use
menthol cigarettes. Menthols were also associated with lower
socioeconomic status, according to the FDA review of available
Those studies showed that menthol in cigarettes was likely
associated with reduced success in quitting smoking, especially
among African-Americans, the review said. The agency declined to
comment Friday on the timing of any possible regulatory actions.
A separate study conducted by Stanford University School of
Medicine researchers in 2011 found that there were more ads for
menthol cigarettes at licensed tobacco retailers near high
schools with a greater proportion of African-American students.
A ban on menthol cigarettes would "eliminate concomitant
advertising that targets young people and some racial and ethnic
groups," said Lisa Henriksen, senior research analyst at the
Stanford Prevention Research Center. She added that tobacco
companies have been targeting African-Americans with advertising
for menthol cigarettes since the 1960s.
Lorillard and Reynolds did not return phone calls requesting
comment. Lorillard says on its site that the company "believes
that the best available scientific evidence does not show that
menthol cigarettes are more harmful than non-menthol cigarettes
and that Americans have a right to make a personal choice to use
any legal product."
In a response to the FDA review last year, the company
disputed that its marketing was disproportionately aimed at
minorities. "For adults who choose to smoke, Lorillard's
marketing seeks to persuade those smokers to choose a Lorillard
brand," the company said.
Roughly 85 percent of Lorillard's $6.9 billion in sales last
year came from the Newport brand. The acquisition talks indicate
that both companies view the regulatory risk from FDA as lower
today than it was a year ago, said Vivien Azer, director and
senior research analyst at Cowen & Co.
"We do not expect an outright ban but would not be surprised
to see incremental regulation down the road," she added.
Still, big bets on menthol may produce limited returns in
the long run. While menthol cigarettes are outperforming
nonmenthol cigarettes, the gap has narrowed in the last three
years because of a decline in overall African-American per
capita use of cigarettes, Azer said.
Lorillard's shares closed Friday at $66.01, up 4.6 percent.
(Reporting by Anjali Athavaley; Editing by Christian Plumb and