Frankly, I'm not sure why it was so major. Even after the presumed merger, the combined company, to be named Reynolds American, Inc., would have a 33% share of the American cigarette business, substantially smaller than the 50% share controlled by rival Altria's
The deal, which the companies announced last October, is seen as being highly beneficial to both parties. RJR will be able to substantially increase the shelf space for its brands, which will include Winston, Kool, Camel, Salem and Pall Mall. RJR had suffered market share losses on both ends, from Altria as well as from the small discount brand companies that are not required to make payments into the $200-billion-plus Master Settlement Agreement with 40 states for tobacco-related health claims. British American Tobacco will get rid of further exposure to the litigious U.S. cigarette marketplace.
The FTC isn't requiring the companies to make any divestitures, which is occasionally a requirement for companies to satisfy antitrust concerns. RJR successfully argued that the rapid rise in discount cigarettes' market share shows firmly that the market has been transformed in the aftermath of the 1998 MSA deal. Generic and off-brand cigarettes now account for 11% of total volume in the U.S. market.
RJR's stock leapt nearly 8% to $70 per share in pre-market trading before settling down to the $68 range. Investors believe that the hundreds of millions in potential cost savings the combination will yield should improve the performance of what has been a laggard in the business. Since the merger announcement, RJR's stock has increased by more than 62%. This means that much of the gloom over the future of the company's business has been right and well wrung out.
Bill Mann has a beneficial interest in RJReynolds. Cigarette companies are renowned income generators for investors. If dividends are your thing, consider a subscription to Mathew Emmert's Income Investor today.
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