Judge's New Menthol Ruling Could Help Lift Tobacco Merger

Mint-flavored cigarettes get new lease on life.

Jul 26, 2014 at 9:00AM


Source: Wikimedia Commons

As part of making the $27 billion megamerger between tobacco giants Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI) work, the two agreed to calve off a number of cigarette brands to Imperial Tobacco Group (NASDAQOTH:ITYBY) in a separate $7 billion deal. Among them were two popular menthol cigarette brands, Kool and Salem, part of Reynolds' support brands that receive only marginal marketing backing.

Although Imperial protected itself from financial devastation by having the two giants include an indemnity clause for any litigation that was tied to the brands, one of the things it couldn't protect against was additional government regulation.

It's been the FDA's position that menthol cigarettes were of special concern as it flexed its newfound muscle over tobacco regulation. Last summer, as it was releasing for public comment its proposed rules for the minty smokes, the FDA included a 2011 "scientific evaluation" that found that although menthol cigarettes created no greater health hazards than regular ones, they increased the likelihood of someone starting smoking while deepening their dependence, and made it harder to quit. In particular, kids were more susceptible to start smoking because of menthol cigarettes, which was why the FDA also banned certain flavored cigarettes.

The tobacco companies had previously filed a lawsuit over the scientific study contending the FDA findings were not only flawed, but were compiled by a cabal of participants who had an ax to grind. One-third of the nine-member committee were doctors who had actually served as paid expert witnesses for lawyers suing the tobacco companies or had financial ties to pharmaceutical companies making smoking-cessation products. Not exactly fair and balanced representation.

In a ruling handed down on Monday, a U.S. District Court judge in Washington essentially said the tobacco companies were correct in their assessment of the panel and the regulatory agency was barred from relying upon its findings in making decisions about menthol cigarettes. He also ordered the agency to reconstitute the panel.

That will be key for Imperial Tobacco going forward, but also for the newly merged tobacco giant, which retained for itself the premier menthol cigarette Newport. Reynolds' top minty cigarette is also the second-biggest-selling smoke behind Altria's Marlboro brand and accounts for 85% of the tobacco company's total revenues. It owns more than 37% of the menthol cigarette market and has a better than 12% share of the entire cigarette market (Marlboro owns more than half.)

Although the agency says it's conducted independent research into the question and reached many of the same conclusions, and will fund even more research into menthol's impact on smoking cessation and attempts to quit, as well as looking at the levels of menthol in cigarettes, with the flawed study tossed and the agency barred from relying upon it, it could be harder to defend imposing restrictions in the future. Considering this judge has sided with tobacco companies in the past, such as on mandating graphic image warnings labels, a lawsuit landing before him over new rules targeted specifically at menthol cigarettes might find him equally sympathetic.

That means Imperial can probably breathe easier that its investments in the menthol cigarettes now won't become undone later, and the new Reynolds-Lorillard company can focus on its Newport brand without additional angst that a key driver of revenues will be snuffed out. Investors in all the related parties can also relax knowing that at least this part of the merger likely won't have a monkey wrench thrown into the works.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information