Economy

British American Tobacco plunges on possible United States move to ban menthol cigarettes

British American Tobacco plunges on possible United States move to ban menthol cigarettes

If passed, the United States will not be the first country to ban menthol cigarettes.

Given the FDA's position that it will follow a science-based approach, it is unlikely the regulatory body will outright ban menthol - although a proposal to restrict or lower the levels of menthol is reasonable, the analyst said. But could their days be numbered?

Professor Robert West, director of tobacco studies at University College London, explains why the FDA is concerned about menthol cigarettes. It also said it cracked down on 1,300 retailers who illegally sold e-cigarettes to minors.

"BAT is the most exposed name to the potential risk", wrote Richard Taylor, an analyst at Morgan Stanley who estimates that USA menthol cigarettes account for 25% of total earnings.

E-cigarette products in mint, menthol and tobacco flavours will still be sold in retail outlets in the U.S. for now, because USA officials did not want to create a situation where cigarettes were more attractive to smokers who prefer a mint or menthol flavour. Because the FDA will continue to allow the sale of menthol in regular cigarettes, the agency doesn't want to give cigarettes an advantage over e-cigarettes.

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Nevertheless, last week's reports are "unwelcome news" for cigarette companies like British American Tobacco PLC (NYSE: BTI), Imperial Tobacco Group plc (OTC: IMBBY) and Altria Group Inc (NYSE: MO), according to Height.

"We are committed to taking the necessary steps to fully confront the epidemic of e-cigarette use that has gripped the nation's youth and set in motion an accelerating epidemic", he said.

British American Tobacco fell 9% to £30.15 while Imperial Brands declined 3.8% to £36.44 on the speculation.

According to analyst Michael Lavery, menthol cigarettes constitute 55 to 60 percent of the total volume of the purchased cigarettes, 25 per cent of global profits. The FDA may impose limits on the sale of many e-cigarette products in the U.S., a senior official told Bloomberg News last week.

Shares in BAT, the sixth-biggest company in the FTSE100 and maker of brands including Lucky Strike, Dunhill, Rothmans and Benson & Hedges, tumbled by 11%, sending its market value plummeting from £76bn at close on Friday to £69bn on Monday. The Winston maker gets about 15% of earnings from menthol brands such as Kool and Salem in the USA, according to Jefferies.