Lebow Turns Over a New Leaf

He says Vector's no-nicotine puff will help millions quit

Miami financier Bennett S. LeBow has always had a wickedly irreverent streak: After a proposed takeover of Prime Computer Inc. fell through in 1989, a dejected LeBow staged a wake for the deal. Dressed in black tie, LeBow and his partner feasted on steak and lobster while their 150 guests ate hot dogs and beer at a New York City restaurant. LeBow, who is Jewish, even brought in a rabbi to say a prayer for the dead deal. For party favors, LeBow handed out lucite blocks containing "Prime" brand condoms.

Since his 1986 acquisition of tiny cigarette manufacturer Liggett Group Inc. for $140 million, LeBow has done his best to spoil the tobacco industry's party as well. A buyout specialist long known for his bottom-fishing, the 63-year-old CEO of Miami-based holding company Vector Group Ltd. (VGR )--formerly Brooke Group Ltd.--has been goading other cigarette makers since he broke ranks with them in the mid-1990s and agreed to settle lawsuits initiated by states seeking to recover the costs of caring for sick smokers. Believing Liggett would be wiped out if it lost in court, he struck a deal: In return for paying $1 million in damages, LeBow admitted that nicotine is addictive and that smoking causes cancer, and turned over revealing industry documents.

QUITTER. In the past year he has testified on behalf of smokers in a multibillion-dollar class action against Big Tobacco. He has also given $2.4 million to Cornell University's medical school for research on early detection of lung cancer.

Now, the self-described maverick says his company is developing a safer smoke that should help some of America's 50 million smokers quit. Later this year, LeBow, who dropped a two-to-three-pack-a-day cigarette habit 30 years ago, hopes to launch Omni, a cigarette that he says has lower levels of carcinogens. And he claims that by early next year, he can bring to market a nicotine-free cigarette, Omni Free, made with genetically altered tobacco. LeBow says safer cigarettes will boost his 1.5% share of the overall market. Once Vector surpasses 1.65% of market share, it will have to start making payments to states, but the new cigarettes would also cost more--about the same as premium brands. "We don't know how big the market is, but we know it's going to sell," says LeBow.

Even while he acknowledges the dangers of smoking, LeBow still makes a ton of money from the habit. Liggett, which sells such discount brands as Pyramid and Tourney and the premium label Eve, reported $73 million in operating income, up 11% for 2000, on sales of $539.1 million, up 34%. "It's a very good business," he says. Vector, with sales of $739.6 million, also has a controlling interest in New Valley Corp., which includes real estate investments and brokerage Ladenburg, Thalmann & Co. With Vector's stock now trading around $26 a share, LeBow's 40% stake is worth about $300 million, or more than 20 times his original $14 million investment.

STRUGGLE. LeBow's toughest test will be persuading smokers to switch to a "safer" cigarette. Rival tobacco companies have tried unsuccessfully to come up with palatable alternative products. R.J. Reynolds Tobacco (RJR ) has been test-marketing Eclipse, a cigarette with lower levels of some carcinogens, since 1996, and it still hasn't figured out how to sell it nationally. Philip Morris Cos. (MO ) pulled the plug on a no-nicotine cigarette a decade ago. LeBow claims Omni Free tastes like conventional cigarettes. But Vector can't back it with the marketing muscle of its much bigger rivals. And it can't advertise Omni and Omni Free as smoking-cessation devices. "Given their small size and small market share, it will be challenging for them to build a new cigarette brand," says Joel D. Luton, an analyst with APS Financial Corp. who personally owns a few hundred shares of Vector. Still, he believes the Omni brands could add $150 million to yearly cash flow within three years.

Big Tobacco isn't LeBow's only hurdle. He struggled to enlist farmers to grow his genetically altered no-nicotine leaves. Many of them worried they would lose export sales if European buyers thought the new crops were mixed in with traditional leaf. But LeBow recently signed up some 600 Amish farmers in Pennsylvania, and now claims he has 80% to 90% of the 4,000 acres he needs. LeBow still faces opposition from smoking opponents, who insist there are no independent scientific studies to verify the new cigarettes are safer--or that they induce smokers to quit. "Nobody knows whether the product Mr. LeBow is introducing today will reduce the risk of disease," says Matthew L. Myers, president of the Campaign for Tobacco-Free Kids.

The son of a door-to-door insurance salesman in West Philadelphia, LeBow got the business bug early, selling men's clothing at a department store while in high school. LeBow says he made his first million after taking a jewelry business out of bankruptcy in the late 1970s. He built his reputation by targeting troubled companies, such as Prime Computer. But the deal that earned him the most attention was Western Union. In 1987, LeBow acquired the company for $25 million. Although it had plunged into bankruptcy by the early 1990s, LeBow focused on Western Union's wire-transfer business and managed to sell it for a hefty $1.2 billion. "When things are really bad, you know he's going to figure out a way to get out of it," says financier Carl Icahn, who teamed up with LeBow six years ago in a failed attempt to break up RJR Nabisco. "He's got a great survival instinct."

Whether LeBow can thrive as an innovator is another question. Persuading smokers to kick the habit through "safer" cigarettes will be his most challenging sale yet.

By Aixa M. Pascual in Durham, N.C.

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