San Francisco has banned the sale of menthol cigarettes and tobacco products, the first US city to issue an outright embargo. This poses a substantial threat to UK tobacco giant British American Tobacco (BATS), which is heavily exposed.
Broker Investec speculates that other cities across the US could implement similar legislation. Analyst Alicia Forry flags Oakland (across the bay from San Francisco) and Minneapolis, both already mulling similar bans.
WHY THIS IS BAD FOR BAT
BAT agreed a $49.4bn deal to buy US rival Reynolds American in January, significantly increasingly its menthol cigarettes exposure. Around half of Reynolds' revenue is estimated to stem from menthol product sales, according to Investec.
Reynolds owns the Newport brand, which has around a 40% market share of the menthol category, states Investec, and is the number two cigarette brand in the US, after Marlboro.
Menthol cigarettes account for more than 30% of all fags sold in the US, so this is a big bump in the road for BAT.
WHY BAN MENTHOL
The San Francisco's legislation tallies with the wider shift against tobacco globally because of the health risks, and related costs. It led to the ban on smoking inside pubs and restaurants in many parts of the world several years ago.
Estimates suggest that smoking costs the NHS anywhere from £2bn to £5bn a year, depending on which data source you take. The bill, presumably, would be substantially larger in the US given its population is four or five-times that of the UK.
FUTURE IMPACT
Investec's Forry says San Francisco’s law states that ‘a national ban on menthol cigarettes could save between 300,000 and 600,000 lives by 2050.’
The immediate impact on consumers could be minimal before escalating over time.
‘Consumers are likely to respond initially by buying menthol cigarettes nearby, or via the internet, but this will become tougher if bans spread’, says Forry.
BAT rival Imperial Brands (IMB) is pitched by Investec as an alternative investment because of its lower exposure to menthol cigarettes. Investec estimates that it generates less than 5% of its sales from US menthol cigarettes through its Kools brand, according to the analyst.
Shares in BAT and Imperial Brands nudge modestly higher in trading on Wednesday, up 1.5% to £52.55 and 1% to £34.45 respectively.
