I've spent some time getting to know the ins and outs of the restructure of R.J. Reynolds (NYSE:RJR), which has taken it on the chin in the past several years as a combination of governmental expropriation, skyrocketing sin taxes, and cutthroat competition from discount brands have conspired to hack away at the company's profits.
RJR finally responded to the pressure, announcing last week that it would save more than $1 billion in a combination of layoffs of more than 2,600 employees and de-emphasis of several of its brands, including Doral and Winston. RJR stock took off like a shot in response, increasing more than 15% in the last few days.
And Nascar fans finally understand that the company wasn't completely off its rocker to abandon sponsorship of the Winston Cup after several decades of stock car racing's national prize. After all, what goes together better than North Carolina's homegrown sport and its homegrown smokes company? Well, how does the Nextel (NASDAQ:NXTL) Cup grab you? Yeah, doesn't exactly have me reaching for a Cheerwine and Moon Pie, either.
Why am I regurgitating a week-old story? Because I came across an interesting tidbit today. According to David Rice of the Winston-Salem Journal, officials in North Carolina are lobbying for the U.S. headquarters of RJR and Brown & Williamson to remain in the state after the two merge. This is all well and good, except that there is no merger agreement between RJR and B&W parent British American Tobacco (AMEX:BTI) at this time. RJR dismissed merger talks as a rumor it will not substantiate.
Still, many on both sides of the pond believe that merger negotiations are ongoing. RJR employees in North Carolina -- a fiercely loyal bunch -- speculate that the severity of the layoffs this time around suggest that RJR is dressing itself up to be taken over. The U.K.'s Guardian noted that RJR's president spoke of the restructuring as being a fundamental change in how it operates its business to deliver profit growth.
Why would RJR, independent for more than 125 years, choose to merge now? Because the tobacco business has changed -- it's persona non grata in statehouses throughout the country, and most cash-strapped legislatures view smokers as little more than a "source of funds."
But not in Winston-Salem, where RJR is family. Last year, this city lost the first of its two economic pillars as Wachovia (NYSE:WB) merged with First Union and moved to Charlotte. If RJR were to move its corporate headquarters to Louisville, Ky., the home of B&W, Winston-Salem will lose yet another one of its icons.
The merger talks may or may not come to fruition, but realpolitik dictates that RJR can no longer survive as a slightly flabby worker's paradise. Things have changed, and whether RJR goes it alone or merges away, the bottom line has grown a heck of a lot more important in Winston-Salem.
Bill Mann owns shares of R.J. Reynolds and Wachovia Bank.
