More moves for RJR?

As the ripples from Tuesday's announcement of major job cuts spread through R.J. Reynolds Tobacco Co., analysts say that the company's restructuring strategy still leaves questions about its future unanswered.

Reynolds announced plans to cut 570 positions by early 2010, including 320 employees being let go involuntarily. The cuts will leave 3,130 local employees.

Reynolds' status as the No. 2 American tobacco manufacturer is not likely to change in the short term.

But analysts say that it cannot afford to remain on the sidelines with its main competitor, Altria Group Inc., towering over a consolidating industry and a new entrant into the pivotal smokeless-tobacco market in which Reynolds has a major presence with its Conwood subsidiary.

The biggest variable now appears to be whether Reynolds will bid for Lorillard Tobacco Co. of Greensboro to buy its top-selling Newport menthol brand. Analysts considered Lorillard a takeover target months before it was spun out from Loews Corp. in June.

That answer could go a long way toward resolving other pressing issues, such as whether there will be job cuts affecting Reynolds' 4,000 production and field-sales employees, its global tobacco-marketing options, and its response to Altria's planned $10.4 billion purchase of UST Inc., the maker of the Skoal and Copenhagen smokeless-tobacco brands.

Even before Reynolds announced plans to spend less on marketing Kool, its leading menthol-cigarette brand, analysts were speculating whether Reynolds needed to buy Lorillard to maintain or expand revenue as consumer demand for tobacco products decreases.

"We are intent on operating our businesses as efficiently as possible to focus our resources on growth priorities, while aligning our plans, processes and cost structures with the competitive and external environment," Susan Ivey, the chairwoman, president and chief executive of Reynolds American Inc., said in a statement Tuesday. Reynolds American is the parent company of Reynolds Tobacco.

Reynolds officials said that the company does not comment on industry speculation. Lorillard did not return requests for comment.

Marc Greenberg, an analyst with Deutsche Bank, said he does not expect Reynolds to bid on Lorillard in the near term.

But Judy Hong, an analyst at Goldman Sachs, said that Reynolds is financially strong enough to make a significant transaction, such as Lorillard.

Reynolds also has been rumored as being interested in buying Swisher International Inc., which makes King Edward and Swisher Sweets cigars and Kayak smokeless tobacco.

Hong said that the anticipated cost savings announced Tuesday -- $100 million with the restructuring and $55 million annually -- "are still far smaller than what Reynolds could achieve from cost synergies from an acquisition." That includes potentially combining cigarette production in a deal for Lorillard.

However, a Reynolds offer for Lorillard likely would face major scrutiny from the Federal Trade Commission on antitrust concerns.

"Reynolds may need to divest Kool if it were to acquire Lorillard," Hong said.

"Some investors may think the probability of Reynolds buying Lorillard is modestly lower. However, the announcement does not change our view on a possible" takeover, she said. "We still believe a deal could occur."

Another factor involving Lorillard is that despite wide support in Congress for regulation of the tobacco industry by the Food and Drug Administration, a debate over whether to restrict use of menthol flavoring within the regulations is threatening to derail the bill.

Lorillard is the tobacco manufacturer with the most at stake, since menthol cigarettes make up 90 percent of its sales.

Charles Norton, the portfolio manager of the Vice Fund -- a mutual fund that specializes in gaming, alcohol, tobacco and defense-industry stocks -- said that adding Newport, with its 33 percent share of the U.S. menthol-cigarette market, "would fortify Reynolds' brand portfolio."

By comparison, Altria's Marlboro menthol brand has 16.1 percent market share, and Kool is at 11.3 percent, according to Sachs Global Investment Research.

Reynolds has also struggled in international sales since the 1999 decision by RJR Nabisco Holdings Corp. to sell the international rights for seven brands -- Camel, Doral, More, Now, Salem, Vantage and Winston -- to Japan Tobacco for $8 billion.

Reynolds said Tuesday that the activities handled by its R.J. Reynolds Global Products Inc. subsidiary are being reassigned to other Reynolds companies.

Reynolds spokeswoman Jan Smith said the changes include:

□ Determining which unit will manage sales through military and duty-free outlets.

□ Evaluating international opportunities for smokeless and premium brands, such as Marshall McGearty.

□ Reassigning international marketing for the company's Santa Fe Natural Tobacco Co.'s Natural American Spirit brand.

Reynolds' latest overseas attempt, a joint venture formed in 2002 with Gallaher Ltd. in Europe, was dissolved by Reynolds after Gallaher was bought by Japan Tobacco in April 2007.

Also, British American Tobacco PLC owns 42 percent of Reynolds American as part of Reynolds' $4.4 billion purchase of Brown & Williamson in July 2004. British American is one of Japan Tobacco's chief international competitors.

That leaves little room for even a toehold for Reynolds in the international market.

"I don't know how Reynolds could pursue international growth on its own, given its noncompete agreement with BAT in connection with the Brown and Williamson deal that prohibits Reynolds from making or marketing its products outside the United States," Norton said.

■ Richard Craver can be reached at 727-7376 or at rcraver


@wsjournal.com.