Imperial Tobacco Group Plc Chief Executive Officer Alison Cooper took a surprise step into the future as a five-year-old e-cigarette brand was included in the $7.1 billion purchase of assets from Reynolds American Inc.’s takeover of Lorillard Inc.
As well as storied labels including Kool, Winston, Maverick and Salem, 113-year-old Imperial will gain Blu, the world’s largest e-cigarette maker. The Bristol, England-based company made inclusion of the brand a condition of the deal, according to a person with direct knowledge of the matter.
“It’s a perfect time for getting Blu,” Cooper, 48, said on a conference call with reporters yesterday. She declined to comment on whether including the brand was pivotal in persuading Imperial Tobacco to agree to the acquisition. Blu was “very important to Imperial in the context of this divestiture package,” Reynolds CEO Susan Cameron said in a joint telephone interview with Lorillard CEO Murray Kessler.
The addition of Blu instantly propels Imperial from laggard to leader in the fastest-growing part of the cigarette industry. Tobacco companies globally are ramping up investment in new electronic devices as governments clamp down on smoking and growing numbers turn their backs on cigarettes.
“The most surprising element is that Imperial is taking the e-cigarette business,” said Philip Gorham, a tobacco analyst at Morningstar Inc. in Amsterdam. “It was probably the sweetener that convinced them to buy what is essentially a selection of third-tier brands.”
The purchase failed to prevent a 3.7 percent drop in Imperial Tobacco shares yesterday as the extent of the Davidoff maker’s increased presence in the U.S. concerned investors such as Richard Marwood of Axa Investment Managers in London. The transaction will increase Imperial’s share of the U.S. tobacco market to 10 percent, propelling it from fifth to third.
“We’re a bit uneasy about the growing exposure in the U.S.,” said Marwood, who helps who helps oversee $700 billion in assets, including Imperial Tobacco and BAT stock. The shares were little changed at 2,596 pence in early trading today.
Imperial was one of the last major tobacco companies to start selling e-cigarettes. Its Puritane product went on sale in February, more than six months after British American Tobacco Plc introduced its Vype e-cigarette.
Blu is the market leader in the $1.7 billion U.S. market for e-cigarettes, which has doubled in size every year since 2009. The brand has a 45 percent market share in the country and its revenue last year was $230 million, Imperial Tobacco said.
It’s also present in the U.K. after October’s acquisition of Skycig and plans to push into France, Germany and the Netherlands as early as this year. Skycig’s annual revenue may quadruple to as much as 100 million pounds ($171 million) by the end of the 2015, Jacob Fuller, Blu’s U.K. CEO, said May 23.
In the U.K., the usage of e-cigarettes has tripled over the past two years, a study by anti-smoking lobby ASH found, with about 2.1 million Britons now using the devices.
Blu will strengthen Imperial Tobacco’s ability to compete in the European e-cigarette market, Ilana Elbim, an analyst at Fitch Ratings in London, said in a statement.
Annual revenue from the U.S. will rise to about 2 billion pounds, or 24 percent of the group, after the purchase from 500 million pounds, or 7 percent, according to Imperial Tobacco. The company sells the USA Gold, Sonoma and Fortuna brands in about 20 states after buying Kentucky-based Commonwealth Brands in 2007.
Marwood cited “uncertainty over whether menthol cigarettes will be banned in the U.S.” as regulators there decide whether to clamp down on menthol varieties such as Kool and Salem.
Cooper and other Imperial Tobacco executives tried to allay such concern yesterday, saying that the U.S. Food and Drug Administration is taking a scientific view and that “the science around menthol doesn’t support a ban.”
The CEO also said she had secured indemnities against historic and some future litigation from Reynolds.
For now, Cooper will be relying on the established U.S. brands she’s acquiring, while pinning future growth aspirations on e-cigarettes, which brokerage Cowen and Co. estimates account for less than 1 percent of tobacco industry earnings.
That presents an opportunity, and also a challenge, for Imperial Tobacco, Gorham of Morningstar said.
“The challenge for Cooper is to keep investing because e-cigarettes are in the incubator stage, and we don’t know whether it’s going to be the leader for long,” he said.