Menthol ban talks knock 10% off BAT

By Thomas Mulier and William Mathis

Shares in British American Tobacco (BAT), which makes Camel, Dunhill, and Lucky Strike and other cigarettes, plunged to their lowest level in more than four years on news of a possible ban on menthol cigarettes in the US, which would eliminate products such as Newport that generate up to a quarter of the company’s profit.

A senior US Food and Drug Administration official said last week that the agency is looking at restricting menthol in traditional cigarettes.

Doing so would be a step toward eliminating or tightly limiting use of the popular cigarette flavour, something the administration has been considering for some time. It would come in a separate action from its planned restriction on e-cigarette flavours, according to the official.

More aggressive regulation of nicotine has been a major priority for commissioner Scott Gottlieb. British American Tobacco shares fell up to 11% at one stage in London, destroying £8.4bn (€9.6bn) of market value.

Shares of Altria, which makes Marlboro cigarettes including menthol flavours, also fell, but by only 1% at one stage in New York.

“British American Tobacco is the most exposed name to the potential risk,” wrote Richard Taylor, an analyst at Morgan Stanley who estimates that US menthol cigarettes account for 25% of total earnings.

The potential ban steps up the administration’s campaign against youth smoking. Clove cigarettes were previously taken off the market, and now the agency is taking a tougher approach to alternatives, too.

The administration has been targeting flavoured tobacco products as studies indicate that teens who smoke menthol cigarettes consumed close to twice as many weekly compared with non-menthol users.

Not all analysts think a ban is likely. Jefferies analyst Owen Bennett said such a move is improbable and would take years to implement.

Tobacco companies would probably mount a legal challenge that would delay the process, Gerry Gallagher, an analyst at Deutsche Bank, also said.

The fall in British American Tobacco shares illustrates that while the Lucky Strike maker is expanding into vapour and heated- tobacco products, its main business is still cigarettes.

The company didn’t immediately respond to a request for comment. Imperial Brands fell 2% in London.

The Winston maker gets about 15% of earnings from menthol brands such as Kool and Salem in the US, according to broker Jefferies.

The proportion is about 20% for Altria, according to the firm.

Imperial will continue to engage with the administration about menthol cigarettes, but will not comment further until there’s a formal update from the agency, spokesman Simon Evans said.

Tobacco companies in the US won an exception for menthol when a federal law banned other flavours in 2009.

British American Tobacco shares have dropped 40% this year.

Bloomberg