4 Ways Reynolds American Can Move Forward With or Without Lorillard

By Markets Fool.com


Image: Reynolds American.

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For months, investors have looked forward to whether Reynolds American would finally get the go-ahead to complete its merger with Lorillard . Yet, with some concerns about the Federal Trade Commission potentially blocking the deal, Reynolds American shareholders are looking closely at what the company might try to do if it can't close on the Lorillard deal.

Reynolds American's management team remains committed to the merger, but in its most recent quarterly conference call earlier this year, management provided some comments that could give hints about what it would do without Lorillard. Let's take a look back to see what Reynolds American said, and what it might mean for investors going forward.

In 2014, VUSE digital vapor products were rolled out across the country after a highly successful performance in Colorado and Utah. VUSE is now available in about 100,000 outlets. ... VUSE is earning the trust and credibility of skeptical vapor users because of its proprietary digital vapor technology and its American assembly. -- CEO Susan Cameron

At the time the Lorillard merger was announced, many saw its blu eCigs brand as having a dominant lead over rivals like VUSE. Yet Reynolds American committed to VUSE in the merger, agreeing to divest the blu brand as part of the deal. As a result, it has worked hard to build up VUSE, and the results have been encouraging.

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Image: Reynolds American.

Cameron said that she anticipates adding more styles to the VUSE brand in the coming months, capitalizing on customer interest. As long as the vapor market stays strong, Reynolds' commitment to VUSE seems to have turned out well.

The moist snuff market remains highly competitive and the company's bottom line was affected in the fourth quarter by increased promotional spending and a modest decline in volume. This resulted in slightly lower earnings while the operating margin remained very strong. -- Cameron

One area of mixed results for Reynolds American was its American Snuff division, with its flagship Grizzly brand driving its overall results. As in the cigarette market, competition is fierce, and falling volume has put pressure on companies like Reynolds American to find ways to boost margins through pricing power wherever possible. Yet with the competitive environment requiring substantial promotional activity, Reynolds American has had some difficulty finding the right balance to maximize earnings.

Still, Reynolds is working at establishing a better mix. The expansion of Grizzly Dark Wintergreen has had positive results in certain areas, for example, and Reynolds hopes that national availability will pay off in better results.

At Santa Fe, performance was very strong once again. Higher pricing in the fourth quarter coupled with higher volume delivered operating income growth of almost 25%. Santa Fe's super premium Natural American Spirit brand added another 0.3 percentage point in market share to 1.8%, making it 1 of the top 10 cigarette brands in the U.S. -- Cameron

CEO Susan Cameron. Source: Reynolds American.

One of the surprising things about the cigarette industry is that even cash-strapped customers have remained willing to pay up for premium brands.

Reynolds' Natural American Spirit has been a huge success story, with the flagship brand of the Santa Fe division building itself into a top-10 brand. By capitalizing on that demand through judicious price increases, Reynolds American has tapped into the demand for organic tobacco made without additives, and that could help drive results regardless of what happens with Lorillard.

I don't have much more to add than I said in my prepared remarks. We are continuing to work with the FTC. The process is not a transparent one. We continue to be confident that it will close in the first half. And how that will all unfold, we will keep you posted when that -- when we know and it becomes public, but I have no real other comment to make. -- Cameron

The problem with the merger process is that executives generally don't make direct comments on what's happening, so it's hard to get a real read on the process. Still, the comments concerning a lack of transparency suggest a level of frustration on Cameron's part, which, given the ongoing delays, is understandable. Until the situation resolves itself -- and many hope that resolution is coming imminently -- you can expect Reynolds American to remain somewhat in flux.

Reynolds American had investors cheering its proposed merger with Lorillard when it was announced. Yet, based on the company's own comments, Reynolds appears poised to keep moving forward no matter what happens with the merger.

The article 4 Ways Reynolds American Can Move Forward With or Without Lorillard originally appeared on Fool.com.

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