Reynolds American Inc., the nation’s No. 2 cigarette maker, vaulted into the smokeless-tobacco market Tuesday by agreeing to pay $3.5 billion for the maker of Kodiak snuff and Levi Garrett chewing tobacco.
The company behind Camel and Kool cigarettes is buying Memphis, Tenn.-based Conwood, owned by the holding company for Chicago’s Pritzker family and the largest or second-largest player in each of the five categories of smokeless tobacco.
Conwood had 2005 sales of more than $450 million and operating income of $250 million, Reynolds said. Moist snuff products have been growing at 4 percent to 5 percent for the past five years, as smoking bans make it harder to light up in public places.
Winston-Salem, N.C.-based Reynolds was attracted by the ability to bring in Conwood’s sales force and equipment, Reynolds chairman and chief executive officer Susan M. Ivey said in a teleconference with investment analysts.
“This provides us with an immediate platform that would have taken us years to build,” Ivey said. The purchase “gives us a strong presence in virtually every domestic tobacco category.”
Reynolds expects the deal to add to earnings in “both the short and long term,” but the company stopped short of updating its full-year guidance.
Second only to Altria Group Inc.’s Philip Morris USA in the U.S. cigarette market, Reynolds said it will pay for Conwood using $300 million in cash and borrowing $3.2 billion.
Prudential analyst Robert T. Campagnino and Citigroup analyst Bonnie Herzog said Reynolds paid a high price for Conwood.
Herzog said she nonetheless thinks it was a good strategic move for Reynolds that collects 25 percent of the smokeless market and keeps Conwood out of the hands of Philip Morris, the maker of top-selling Marlboro.
“We believe this is an exciting opportunity,” she said in a note to investors Tuesday.
Herzog said the purchase also allows Reynolds to control the price of Conwood’s deeply discounted Grizzly brand, which has been driving down the cost of other smokeless brands.
Campagnino said Reynolds would have a hard time raising prices for Conwood products without a lot of effort, but the purchase “is likely to have significant, negative long-term consequences” for smokeless leader UST Inc., whose brands include Copenhagen and Skoal.
While some investors may believe Philip Morris may react by buying UST, Campagnino said in a note to investors Tuesday he thinks Philip Morris “is more likely to build than buy if it enters the smokeless segment.”
Reynolds plans to combine Conwood with its Lane Limited unit and base the newly formed division in Memphis. Lane Limited makes cigars, pipe tobaccos and premium international cigarettes like Dunhill.
The sale is among the first by the Pritzker Organization since a family dispute over dissolving its $15 billion fortune was settled last year. The Pritzker family interests include companies such as Hyatt Corp., industrial conglomerate the Marmon Group Inc., and Royal Caribbean Cruises Ltd.
Conwood was offered in a private auction beginning in December, Reynolds general counsel Charles Blixt said. The purchase agreement was signed late Monday, he said.
The family sold Conwood because “we felt a strategic buyer would be in the best position to continue the growth of the company,” said Tom Pritzker, chief executive officer of the Pritzker Organization.
The Conwood sale is subject to regulatory approval but was expected to close by the end of the quarter, Reynolds said.