Consolidation ignites in the US electronic cigarette space – industry sources
Mergermarket, Thursday, 20 March 2014, 1194 Words, (c) 2014, Mergermarket
Big tobacco seeks to capture customer migration; some buying their way in Possible FDA ban prompting mainly small online e-cig players to consider selling Larger targets could include Victory, Vapor, NJOY, LOGIC, V2, BallantyneSmaller online electronic cigarette companies facing significant competitive pressure are starting to sell out to big tobacco to expand their retail presence, as well as to arm themselves against potential government measures that could effectively cause their businesses to go up in smoke, said several industry sources.The US e-cigarette landscape remains highly fragmented, with about 250 different players selling mostly online, said Jeffrey Holman, president of e-cigarette maker Vapor Corp.
(OTC:VPCO) and Thilo Wrede, a Jefferies analyst.
The combination of big tobacco’s in-house brands, e-cigarette consolidation and the threat of an FDA ban on online sales are pressuring many small independents to sell before it’s too late, said Holman, Wrede and Vivien Azer, tobacco analyst for Citi.The Food and Drug Administration (FDA) late last year began discussions with the e-cigarette industry about a possible online sales ban as part of an effort to restrict nicotine sales to minors.
Additionally, all the big US tobacco companies have acquired and/or have plans to introduce their own lines of e-cigarettes by the end of this year, the sources noted.“There are dozens of willing sellers out there,” though most are very small, according to Wrede.There are also a handful of larger players with online sales and a significant retail presence, and with roughly USD 20m to USD 250m in revenue, noted Homan.
He, an industry analyst and an industry source said all are likely seen as attractive targets.They include Victory Electronic Cigarettes (OTC:EGIC) , Vapor Corp., NJOY, LOGIC, V2 Cigs and Ballantyne Brands, according to those three sources.Potential buyers, according to the industry source and a third sector analyst, include US-based Altria Group (NYSE:MO) and Reynolds American (NYSE: RAI), as well as UK-based British American Tobacco (LON:BATS) and Imperial Tobacco Group (LON:IMT).‘Vaping’ here to stayMajor tobacco companies are seeing non-combustible cigarettes as not a passing fad, but a disruptive technology, and are looking to preserve customers migrating to the healthier, cleaner “vaping” alternative, all sources agreed.
Annual growth for e-cigarettes is topping 20%, with 31% more shelf space being devoted to them, according to the third analyst, who believed consumption of e-cigarettes will eclipse consumption of traditional cigarettes over the next decade as technology improves and conversion continues to accelerate.E-cigarettes have no smoke, tar or carcinogens.
US sales are projected to reach USD 3bn-USD 5bn in 2015, and potentially USD 10bn by 2017, according to industry estimates.In April 2012, Lorillard (NYSE:LO), the North Carolina-based maker of Newport cigarettes, acquired North Carolina-based Blu eCigs for USD 135m in cash.
In February of this year, Virginia-based Altria, parent to Phillip Morris USA and maker of the MarkTen e-cigarette, bought the e-vapor business of Green Smoke for USD 100m in cash and up to USD 20m in incentive payments.
Atlanta-based Green Smoke was reported to have had 2013 revenue of USD 40m.Multiples in the space are averaging around 2x-3x revenue, according to Victory CEO Brent Willis, in an 18 March report by this news service.Lorillard’s Blu controls 40% of the US e-cigarette market, according to Wrede.
The company has upwards of USD 250m in sales, according to the industry source, who along with Azer believed Lorillard was less likely to seek additional acquisitions.However, the industry source and third analyst did believe Altria, the largest tobacco company with brands including Marlboro, was likely to make more buys to scale on its MarkTen and Green Smoke investments.UK-based Imperial, which last year bought Dragonite International’s China-based e-cigarette business for USD 75m, likely has interest in US companies to bolster its presence in the states and catch up with competitors in tobacco alternatives, said the first industry analyst and the industry source.The number two tobacco player, North Carolina-based Reynolds American, has developed the VUSE e-cigarette, which has been slower to gain traction, according to the industry source, who believed it could potentially acquire a more established brand.London-based British American, Europe’s largest cigarette maker and a player in the US, last year introduced its Vype vapor cigarette and plans to introduce a second brand in 2015, according to published reports.
It too could be a buyer, speculated the third analyst.That analyst noted Reynolds as a British American target, as British American owns a 42% stake in Reynolds and has an option to acquire the outstanding shares.
The analyst believed there was more than a 50% chance British American would act on its option, as a way to gain further financial benefit in the US and access to the e-cigarette market.Potential targetsVictory CEO Willis recently told this news service he was hired one year ago to expand the mainly online seller’s retail presence.
The Michigan-based company, which has a market cap of approximately USD 776m, has made two recent acquisitions and continues to seek global buys.Victory is a consolidator in the space and has no plans to sell, believing it can clinch the number one global independent player spot within 90 days, as previously reported.Vapor Corp.
CEO Holman said nothing is off the table, but that the Florida-based company, which has a market cap of roughly USD 115m, is not actively seeking a sale.NJOY, the largest independent player in the space, is also attractive, though, like Victory, it is seen as a logical consolidator as well, the industry source and third analyst said.
Azer did note that Arizona-based NJOY is seeing some deceleration in its retail sales due to increased competition.
The Catterton Partners-backed company has raised more than USD 75m in outside capital, according to published reports.
It could have upwards of USD 100m in revenue, estimated the industry source.Other possible targets, according to the industry source and third analyst, include Florida-based V2 Cigs, which according to a published report has more than USD 100m in revenue, and New Jersey-based LOGIC, an “eight-figure company with millions in revenue,” according to a company press release.
LOGIC is one of the fastest-growing brands in brick-and-mortar, Azer said.North Carolina-based Ballantyne also is a significant, well-funded player, with an estimated USD 50m in revenue, according to the industry source.Earlier this month, a unit of Imperial Tobacco sued Lorillard, NJOY, Vapor Corp.
and eight other makers of electronic cigarettes in US patent lawsuits, alleging infringement on its intellectual property.
Several of the sources said it is premature to comment on the suit, though one noted that similar suits have been brought twice previously, with limited success.Hon Lik, founder of e-cigarette maker Dragonite, which Imperial acquired, claims to have invented e-cigarettes a decade ago. By Deborah Balshem and Jeff Sheban