We reported back in the summer about Blu E Cig getting dumped by Lorillard as part as their agreement to merge with RJ Reynolds. Is it time to start pumping the breaks on this mega-deal that would consolidate the second and third biggest tobacco makers in America?
The idea behind the RJ Reynolds buyout of Lorillard is that the new company could then fully take on the top tobacco company in the US, Altria. This also meant the new conglomerate could safely drop Blu E-Cig (sold to Imperial Tobacco) in favor of the RJ Reynolds brainchild Vuse to directly compete with the Altria brand MarkTen. But could antitrust regulations make all this talk for naught?
Trying To Compete With Altria
If RJR is able to consummate the transaction with Lorillard then they would be that much closer to challenging Altria for top spot in tobacco dollars. That would essentially leave two giants in almost total control of the majority of the tobacco industry.
Competition is good but when it is limited to two main interests, it is not good for the consumer and free market principles are easily manipulated to benefit the corporations. The Federal Trade Commission is taking a good hard look at what the purchase of Lorillard will do to the tobacco industry and how it will affect the market. Will the FTC invoke antitrust enforcement to stop the RJ Reynolds purchase of Lorillard from going through?
That is some of the latest speculation as antitrust regulators struggle to deal with a tobacco industry that is growing more and more into a monopoly. This is exactly what antitrust laws are supposed to prevent, because monopolies restrict a consumer’s choice.
What they also do is keep prices high by eliminating competition. In most industries this would be critical, but because we frown on tobacco so much the question of an RJ Reynolds merger with Lorillard keeping cigarette prices high isn’t an easy one to answer.
On one hand, the government doesn’t like monopolies. On the other, it doesn’t like tobacco companies either and would like to see less people smoking. The higher prices are on cigarettes, the more likely people will try to stop buying them, or so goes the theory.
Of course e cigarette brands can get in on these rising prices to provide a viable alternative to traditional tobacco cigarettes, meaning a silver lining for the ecig industry too. Yet only having two big tobacco companies backing Vuse and MarkTen in every corner shop could also restrict competition.
Being that electronic cigarettes are still a small part of their business, we aren’t even sure that antitrust regulators take this into account. Besides, those e cigarette brands don’t even hold the top market share.
Blu E-Cig Still Holding Top Spot In The Market
The honor of top market share still (barely) goes to Blu E-cig that is now owned by Imperial Tobacco. Yet if the $3 billion electronic cigarette industry continues to grow as expected, you can be that big tobacco will be looking to make themselves the biggest players in the game.
They’ll even try to make themselves the only players in the game, like they are with traditional tobacco cigarettes.
Both RJR and Altria have established subsidiaries to compete in the ecig industry. You can bet that they will be heavily promoting their own brands, Vuse and Mark Ten.
Will they actually overtake Blu for top position in the market place? They could. While Blu has a massive marketing budget, the head offices of Altria and RJR have a lot more. As for independent e-cigarette companies, they obviously would be at a serious disadvantage.
So what remains is a very confusing decision by top government officials as to what to do with this merger. RJ Reynolds and Lorillard will argue at how different the tobacco industry is with regard to competition.
Herbert Hovenkamp, who serves as a law professor for the University of Iowa, believes the companies will take the tact that this actually creates more competition. He says, “The offsetting consideration is if they will be able to convince the Federal Trade Commission that competition between two more or less equal firms will be more strenuous than between one larger and two smaller firms.”
This would be a competition that is further strained by rising tobacco taxes and a decreasing customer base, but still Big Tobacco makes tons of money. In the balance is a deal that is shaking things up for the e-cig market as well.
Will Nu Mark And RJR Vapor Dominate E-Vapor Just As Altria And RJR Dominate Tobacco?
Since Imperial Tobacco has taken over Blu ecig, they have had to fight to keep their market share away from Vuse and MarkTen, among other existing e cigarette brands. The decision for Lorillard to spin off Blu as part of this deal could become highly suspect should this merger not happen for whatever reason.
At that point Lorillard could find itself holding the bag by not having their own e-cig brand to promote. In this climate where ever tobacco companies needs at least on e-cig of their own, it would not bode well for Lorillard to have to g back to square one.
Altria has put its vaping subsidiary Nu Mark into high gear. Nu Mark’s prize innovation is the Mark Ten. They have targeted the “e-vapor” business with a 2014 roll-out of the Mark 10 that is now almost fully nationwide.
They call the Mark Ten an ‘e-vapor device’ that also features something Nu Mark called “four draw technology”. This basically means that the Mark Ten has four holes to draw vapor from rather than one.
RJ Reynolds e-vapor subsidiary is RJR Vapor. The Vuse Digital Vapor Device is their primary product. The Vuse has enjoyed a national TV ad campaign that has given it an instant profile. It is now available in every state.
If this deal were to fall apart, Lorillard would find itself basically out of the e-vapor game and perhaps too far behind to ever catch up. Lorillard would go from leading Big Tobacco’s charge into e-cigs thanks to Blu to not being a player at all.
Yet, partly because of the Blu E-cig deal, we find it hard to believe that this deal really would fall through. Perhaps aspects of it will have to be realigned, but we don’t think that after the long negotiations and all the money involved that RJ Reynolds and Lorillard would let this fall apart.
It isn’t completely up to them, but one must assume they took every precaution possible to ensure the deal’s passage. This is probably what gives David Howard, a spokesman for RJ Reynolds, the confidence to say “We continue to move forward with the process and we are confident that the deal will close sometime in the first half of 2015.”
That timeline is rather short but obviously realistic according to their thinking. All that is left is to finally reveal the thinking of antitrust regulators so we can find out if this deal is going to sink or swim. It will be fascinating to watch the outcome, that’s for sure.