Reynolds: Smoking to Smoking Cessation (RAI, GSK)

Reynolds American Inc. (NYSE: RAI) has an interesting approach in M&A today.  The deal is a tiny merger valued at $44 million when you consider that Reynolds has almost a $15 billion market cap, but this is a potential game-changer in tobacco.  The company is acquiring all outstanding shares of the Swedish-based nicotine replacement therapy company Niconovum AB.  When you look over the brands of tobacco, it seems that the company is deciding (and smartly) to capitalize off of the smokers who want to quit smoking.

Reynolds holds about five of the ten top-selling U.S. cigarette brands: Camel, Pall Mall, Winston, Kool and Doral; and the company also owns Santa Fe Natural Tobacco Company, which manufactures Natural American Spirit cigarettes.  On the smokeless tobacco arena it owns Conwood Company (soon to be American Snuff), the second largest U.S. maker of smokeless tobacco products with brands like Kodiak, Grizzly and Levi Garrett.  Now it is adding nicotine replacement to its portfolio.

Niconovum markets nicotine replacement therapy products under the Zonnic brand name in Sweden and Denmark.  These products are nicotine gum, mouth spray and pouches which use proprietary technology for nicotine delivery.

The company noted that it believes this acquisition of Niconovum will enable it to provide adult tobacco consumers with innovative cessation products.  It is expected that the transaction will be completed by year-end.

It is probably way too early to call this a direct mass market competitor to Nicorette from GlaxoSmithkline (NYSE: GSK), but that is perhaps the top brand recognized for nicotine gum.

Considering how many people use nicotine gum on a recreational basis and how many smokers go through the quitting process multiple times before they quit (if they quit), it doesn’t seem as though it will be very hard nor will it take very long for Reynolds to recapture its investment here.

JON C. OGG
DECEMBER 2, 2009