The Department of Housing and Urban Development is proposing a smoking ban.
The Department of Housing and Urban Development is proposing a smoking ban. - 
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The second-largest cigarette maker in the U.S., Reynolds American, is trying to acquire the third-largest cigarette company in the U.S., Lorillard. The deal speaks volumes about the current and future state of the tobacco industry.

While smoking has declined in the U.S. (18 percent of adults smoke here), the U.S. remains a major profit center for the tobacco industry – while it accounts for only 5 percent of volume, it produces 14 percent of all revenue globally. Tobacco firms have been raising prices to offset declining demand. Consolidation helps cut costs, and a duopoly could make raising prices in the future even easier.

Also factoring into the deal: Lorillard owns Blu e-cigarettes, a market leader in a small but persistent cigarette alternative. Finally, Lorillard also owns menthol-flavored Newports. Premium menthol-flavored cigarettes like Newports are the one area of the industry where sales are flat or barely declining, and Newports have very strong brand loyalty.

If the cigarette industry is slowly burning out, Reynolds is buying a few extra years on its life.

Graphic by Shea Huffman/Marketplace

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