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Lorillard Acquires UK E-cigarette Brand

Zacks Equity Research

The rising popularity of electronic cigarettes and the success of blu e-Cigs among youth in the U.S. encouraged cigarette maker Lorillard, Inc. (LO) to expand its presence globally in the electronic cigarette industry. Lorillard signed an agreement on Oct 1 to acquire all the assets and operations of SKYCIG, a leading premium brand of electronic cigarettes in the UK.

Per the deal, Lorillard will pay approximately 30 million pounds in cash at the time of completion of the deal. In addition, the deal includes a clause to pay an additional 30 million pounds in 2016 on the achievement of certain financial milestones. Post-acquisition, SKYCIG will become a separate operating subsidiary of Lorillard and the company will retain its current management team and business locations in the UK.

Lorillard captured a leading position in the electronic cigarette industry in the U.S. after it acquired e-cigarette brand blu e-Cigs in Apr 2012. The SKYCIG acquisition will further boost Lorillard’s sales as the e-cigarette segment is evolving rapidly. It will also provide this Zacks Rank #2 (Buy) company an opportunity to expand in the wide UK electronic cigarette market. On the other hand, SKYCIG is expected to gain from Lorillard's marketing, regulatory, research and development expertise, which will help the brand to further strengthen its foothold in the UK e-cigarette market.

We note that smokers are shifting their preference to electronic cigarettes due to rising health concerns. Though sales of electronic cigarettes are on the rise, the maker of Newport and Maverick brands has been witnessing a decline in traditional cigarette volumes since the past many quarters. Cigarette volumes have been impacted by a slowdown in the tobacco industry, increasing health consciousness among consumers and significantly higher prices of cigarettes. Moreover, the industry deals with increased regulation on packaging (graphic warning labels) in some international markets and heightened Food and Drug Administration (:FDA) concerns about the effect of menthol and electronic cigarettes.

The company has been making constant efforts to revive volumes. The company has plans to expand Newport cigarettes in the under penetrated markets of  the U.S. and is also keen on offering new products and discounts.

Consumer goods stocks that warrant a look are Pinnacle Foods Inc (PF), Green Mountain Coffee Roasters Inc (GMCR) and Omega Protein Corp (OME), all of them holding a Zacks Rank #1 (Strong Buy).

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