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WILLIAMSBURG, Va. — The past few months have raised more questions than answers in the tobacco category. Will Reynolds American Inc. (RAI) and Lorillard Inc. get the OK to merge? Will e-vapor products be the game changer many industry insiders are banking on? What will the Food and Drug Administration (FDA) do with menthol?
While no one has a crystal ball, leading tobacco analysts gathered at the Tobacco Merchants Association (TMA) Centennial Annual Meeting & Conference Wednesday to bring some insights to these questions. The panelists were Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC; Michael Lavery, director and senior analyst at CLSA; and Vivien Azer, director and senior research analyst at Cowen & Co.
RAI and Lorillard announced in July their plans to merge in a $27.4-billion deal, which also calls for Imperial Tobacco to pay $7.1 billion to acquire the Winston, Kool and Salem brands from RAI and the Maverick and blu eCig brands from Lorillard. As the players approach the 11-month mark, the analysts expressed surprise the deal hasn't received final approval from the Federal Trade Commission (FTC) yet, though they expect it any day.
In fact, Herzog and Lavery jokingly said they expect the final nod to come when they are on a plane or on vacation.
"I am a little surprised it is taking longer than expected," Herzog said, noting she expected an announcement in March or April.
"The fact that it is taking so long is a little curious and unexpected," Lavery agreed.
While all three believe the FTC will give the deal the green light, Herzog is the most bullish by giving it a 90-percent probability rating. Lavery puts the chances lower, at between 65 percent and 70 percent.
According to Lavery, the potential deal raises some issues the FTC may be addressing: it gives RAI a significant concentration in menthol, and there are questions over Imperial's long-term potential as a third player in the U.S. tobacco space.
These concerns could be what is holding up the deal at this point. Herzog said there may be some changes to the proposed transaction, but "nothing dramatic."
Imperial "has a chance" as a No. 3 player in the United States if it puts some money behind the Winston brand, she explained. However, Lavery cautioned if Winston succeeds on price promotion, it could take away from Imperial's other value brands.
As for other potential mergers in the tobacco industry, the analysts agree the next moves could be in the international arena, as well as in the e-vapor space — more consolidation like the recent Japan Tobacco and Logic Technology Development deal.