Electronic Cigarettes International Group Ltd fka ECIGQ

[vlftraders]

A MUST READ FOR EVERY ECIG SHAREHOLDER...............

Buyout target price: $0.50+

Electronic Cigarettes International Group, Ltd. (OTCQB:ECIG) will be bought out by a large tobacco company. 50 cents is a good starting point but if there is a bidding war it could go well over that. Even on a heavily discounted company like ECIG there are risks involved so everyone should read my first article on ECIG for some background and to understand those risks. I also recommend reading ECIG's Form S-1 as a lot of the company's information in this article originates from there.

Reason #1: The tobacco industry is in decline, the e-cigarette industry is on the rise.

E-cigs are seen as a healthier and less socially intrusive alternative to traditional cigarettes. E-cig sales in the United States are projected to rise 24% per year through 2018 and some think it will surpass the tobacco cigarette market in 10 years. Cigarette companies have been aggressively trying to corner this market through product development and purchases of e-cig companies. The market acceptance of tobacco company produced e-cigs has been mixed, leading to several acquistions of e-cig companies taking place in 2013 and 2014 as they look to quickly capture market share.

Reason #2: ECIG is the world's largest independently owned electronic cigarette company.

A tobacco company that wants to make a big splash in the industry would pursue ECIG as its purchase of leading e-cig brands like VAPESTICK and Fin along with its Victory brand has led it to become the world's largest independently owned e-cig company with significant presence in the United States and United Kingdom while expanding worldwide.

Reason #3: Revenue has grown from $3 million in 2013 to $80 million in 2014.

CEO Brent Willis has stated that ECIG's revenue will exceed $80 million for 2014, implying $50 million in revenue for Q4 alone. I project revenues to exceed $200 million for 2015 based on Q4's run rate. This growth has far exceeded company and investor expectations from $3 million in revenue seen in 2013 thanks to the acquisitions and organic growth. Big tobacco buying out ECIG is not just a defensive move to protect future revenue streams, but can have a significant boost to revenue today.

Reason #4: The stock is trading at an extreme discount.

For reasons outlined in my previous article, ECIG has tanked from a high of $20 to $0.11 this year. ECIG had an IPO in the works which valued the company at $678 million in market cap, but the drop in its stock price caused it to fall through. The IPO was meant to bring in $150 million for less than a 25% stake of the equity in the company. Conversions from debt to equity has caused the share count to rise to around 150 million, and I estimate that net debt for the company has dropped from $40 million to $30-$35 million. Total enterprise value for the company is around $50 million. A tobacco company could offer a $0.50 per share deal that would cost around $75 million and assume $35 million in debt for a total consideration of $110 million. The entire company can now be had for less than what the IPO would have purchased for a mere fraction of it. I don't expect big tobacco to let this Boxing Day sale of 85% off to slip by for too long.

Reason #5: A former executive of Wal-Mart sits on the BOD.

Bill Fields was President and Chief Executive Officer of Wal-Mart Stores Division, and Executive Vice President of Wal-Mart Stores, Inc and spent 25 years with the company from 1971 to 1996. Having someone with such a close relationship to the largest retailer is very beneficial as he can help negotiate privileged shelf space. As Wal-Mart contemplates the removal of tobacco cigarettes from the shelves of all its stores at some point in the future that relationship becomes even more important to big tobacco companies as e-cigs may be the only product that will be carried. For now tobacco cigarettes offer too big of a business for Wal-Mart to seriously consider their immediate removal from all locations, but if e-cigs surpass tobacco cigarettes as some forecasted in a decade, that decision may be much easier at that time. It would be wise for a tobacco company to solidify an advantaged relationship to the retailer versus other cigarette makers sooner rather than later.

Reason #6: Leading point of sale and distribution presence.

Through organic growth and acquisitions, ECIG's brands are available in over 50,000 different points of distribution including Wal-Mart, Walgreens, Tesco, 7-Eleven, Speedway, Shell and HEB Grocery Company, and with leading distributors, including McLane and Core-Mark in the United States and Palmer and Harvey in the United Kingdom. The company sells online and through over 100 of its own kiosks in the UK. A tobacco company starting its e-cig business from scratch would take years to build the relationships and get the shelf space up to par with ECIG. Bill Fields is the CEO of Fields Texas Limited which has long standing relationships with some of the world's largest retailers and ECIG intends to leverage those relationships to significantly expand distribution.

Reason #7: ECIG's multi-brand/multi-product strategy captures all sorts of e-cig users.

ECIG sells electronic cigarettes under several different brands, including FIN, VIP, VAPESTICK, Victory, Victoria and El Rey. While many competitors focus on a single brand or product type, ECIG's product offerings span the range of customer interests including disposables, rechargeables, tanks, starter kits, e-liquids, open and closed-end vaping systems and accessories and have a global presence. In the U.S. the company's Victory brand functions as the discount brand, while FIN branded products represent its premium offering. Some tobacco companies have made multiple purchases of e-cig companies to get a foothold into the different market niches. Because ECIG already did the work to turn itself into an e-cig "conglomerate", a tobacco company would need to make just one purchase to cover everything from diverse product line to expansion in multiple countries. That's a lot easier than buying out several companies and combining them all in one e-cig division.