Reynolds American Moves into Smokeless Tobacco

WINSTON-SALEM, N.C.--Reynolds American Inc. (RAI) broke into the smokeless tobacco category with the $3.5 billion agreement to purchase a holding company that owns Conwood, the nation's second largest manufacturer of smokeless tobacco products.

Citigroup reported that the acquisition was a "good strategic move for RAI to secure the No. 2 position in the smokeless market and keep it out of the hands of its major competitor, PM (Phillip Morris) USA."

"Conwood provides us with a significant, strategic platform within the growing moist snuff category that would have taken years to build," said Susan M. Ivey, chairman and chief executive officer of Reynolds American. "The moist snuff category has been growing at four percent to five percent for the past five years. Clearly, we're excited by this unique opportunity to gain immediate scale and strength in the category."

An April 4, 2006, Citigroup report predicted that an acquisition of Conwood by either Reynolds or its competitor Philip Morris would be a strong move for either of the cigarette giants.

According to the report, Conwood would provide Reynolds with a "quick market share grab, a platform to launch its own premium brand, substantial cost savings and synergies and control of the deep discount segment."

Conwood is the only company to compete in all five segments of the U.S. smokeless tobacco industry, manufacturing moist and dry snuff; and loose leaf, plug and twist chewing tobaccos. Moist snuff accounts for more than 70 percent of Conwood's sales, led by its premium-priced Kodiak brand and its rapidly growing value-priced Grizzly brand.

"We are very proud of what our team has accomplished," said Tom Pritzker, chairman and CEO of The Pritzker Organization (the Pritzker family holding company that controls Conwood). "Having achieved a strong position in the market, we felt that a strategic buyer would be in the best position to continue the growth of the company. In Reynolds American, we found a management team that is both compatible with our management team and, in our view, has the vision and capabilities to capitalize on what we have achieved."

"This transaction is expected to be accretive to earnings in both the short and long term, and enhances shareholder value," said Dianne M. Neal, RAI's executive vice president of finance and chief financial officer. "Conwood's strong growth and high margins should make it an important driver of RAI's future profitability."

Richard Mione, vice president of marketing for Wilmington, N.C.-based Worsley Companies, which operates 127 locations, believes the acquisition of Conwood will strengthen Reynolds' position in the tobacco business.

"Going to a market with established brands should prove to be more successful than trying to develop their own brands as was previously rumored," Mione told CSNews . "The Reynolds team did a great job of merging two cigarette companies and defining brand strategies that would add value."

However, Mione is concerned about how and if Reynolds will tie the Conwood brands to retailers' programs.

"The RJR contract is already very aggressive; requiring more from retailers could cause a problem as retailers may not or cannot meet all the requirements," Mione told CSNews .

"The other unknown is the strategy that United Smokeless Tobacco (UST) will now take to maintain and or grow their market share," he continued. "The cost of doing business could play a major role in the strategies and future of UST."

Previously, Citigroup reported that an acquisition of Conwood would change the smokeless market by "eliminating irrational price competitors" and predicted it would place negative pressures on UST given the heightened competition.

Reynolds American will combine its Lane Limited subsidiary with Conwood in order to consolidate and drive the companies' portfolio of other tobacco products (OTP). Lane markets a wide range of specialty tobacco products, including cigars and little cigars; roll-your-own and pipe tobaccos; and Dunhill and other premium international cigarettes.

The headquarters of the newly combined companies will be located in Memphis, and full integration is expected to be completed by the end of 2007.

The transaction will require regulatory approval by the Federal Trade Commission. The acquisition is expected to close by the end of the second quarter.