RJR To Buy Brown & Williamson

Discussion
Oct 28, 2003
George Anderson

By George Anderson


R.J. Reynolds has agreed to buy Brown & Williamson from British American Tobacco in a stock deal valued at $2.6 billion, reports the New York Times.


The newly created Reynolds American Tobacco, assuming the deal receives regulatory approval, would have brands representing roughly one-third of cigarette category sales.


Philip Morris remains the number one player in U.S. tobacco sales with 50 percent of the market.


“The combination of these companies will enable us to achieve tremendous efficiencies,” Andrew J. Schindler, Reynolds’ chairman and chief executive, said in a statement, “and
will greatly enhance our ability to compete effectively in the U.S. market.”


Bonnie Herzog, a tobacco industry analyst with Smith Barney told the Times, “It has been extremely difficult for both RJR and B. & W. to compete against Philip Morris
given both companies’ lack of scale,” Ms. Herzog wrote. “This has been a big issue at retail and has resulted in barriers for both companies to secure attractive real estate/shelf
space. Therefore, some combination of the two companies would increase their presence at retail and most likely make the combined entity more efficient.”


Moderator’s Comment: What will this deal mean for cigarette manufacturers and retailers?


The cigarette business is still mostly about brand loyalty, and the brand consumers are most loyal to is Marlboro. This deal will not change that and we
wouldn’t expect, as Bonnie Herzog suggests, this deal will have much benefit for Reynolds America in its attempt to get a larger and more visible presence on the shelf.


The deal will, however, allow the combined company to pare payroll providing it greater return on the portion of the category that it holds. [George
Anderson – Moderator
]


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