North Atlantic Trading Company Inc. Business Information, Profile, and History

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Zig-Zag: Quality you can trust.

History of North Atlantic Trading Company Inc.

North Atlantic Trading Company Inc. is a New York City-based holding company for several subsidiaries involved in the tobacco industry. National Tobacco Company, L.P. is the third largest loose-leaf chewing tobacco company in the United States. Its most famous brand is Beech-Nut. North Atlantic Operating Company, Inc., under an agreement with Bollore, S.A., sells cigarette papers, tubes, loose tobacco, and cigarette-making machines under the world famous Zig-Zag brand. North Atlantic Cigarette Company, Inc. markets and distributes Zig-Zag Premium Cigarettes. North Atlantic's chairman and chief executive officer, Thomas F. Helms, Jr., owns 49 percent of the privately held company.

Formation by Helms in 1988

Helms started his business career at Revlon Inc. He held a number of sales and marketing positions from 1964 to 1979 before becoming general manager of Revlon's Etherea Cosmetics and Designer Fragrances Division. In 1983 he was named president of Helme Tobacco Company, the smokeless tobacco subsidiary of Culbro Corporation that manufactured and marketed Navy and Railroad Mills dry snuff; Gold River, Wilver Creek, and Redwood moist snuff; and chewing tobacco under the Mail Pouch, Chattanooga Chew, and Lancaster brands. Two years later, in September 1985, Culbro announced that Helme was up for sale. Several weeks later Helms resigned in order to put together a leveraged buyout proposal. In the end, however, the business was sold to Swisher & Son. Inc., the cigar subsidiary of American Maize-Products Co.

Despite failing to buy Helme, Helms decided to remain in the tobacco business. In 1988 he and an investor group led by Lehman Brothers formed National Tobacco Corporation to acquire the smokeless tobacco division of Lorillard Tobacco Company. Lorillard was the oldest tobacco manufacturer in the country, launched in 1760 by French immigrant Pierre Lorillard in New York City to make pipe tobacco, cigars, plug chewing tobacco, and snuff. The company would become a pioneer in marketing, paying farmers for painted signs on the sides of their barns, initiating the use of trading cards, and according to some, introducing the cigar store Indian. In the 1890s Lorillard introduced Beech-Nut chewing tobacco. It was also during this period that it became part of American Tobacco Co., the massive tobacco trust created by legendary James Buchanan Duke, who parlayed the rights to a cigarette-making machine into the creation of a corporation that at one point controlled 90 percent of the U.S. market in cigarette sales. In 1911 the trust was ruled in violation of the Sherman Anti-Trust Act and dissolved. Lorillard along with R.J. Reynolds and Liggett & Meyers became products of the breakup.

While Helms remained in New York City to manage the company, National Tobacco took over Lorillard's manufacturing facilities in Louisville, Kentucky, where it produced loose-leaf chewing tobacco under a variety of labels. The next major step for the company came in 1997 with the acquisition of North Atlantic Trading Co. Inc., which had been formed by investors in 1993 to make the $39 million acquisition of Zig-Zag's distribution rights from UST Inc. To finance the Zig-Zag purchase and restructure its debt, National Tobacco negotiated a $300 million high-yield bond issue and loan package assembled by a group of European Investors with Natwest, the U.S. investment branch of Britain's National Westminster PLC, leading the effort. Upon completion of the acquisition, National Tobacco gained the exclusive rights to market and distribute Zig-Zag cigarette papers in the United States, Canada, and other international markets. It also took on the North Atlantic Trading Company name as part of a plan to invest in other tobacco-related areas. The Louisville facility was using only about one-third of its capacity, leading management to think about taking on new product lines. The most likely addition was dry snuff, but there was also talk at this stage of introducing a new blend of loose-leaf tobacco for "make-your-own" (MYO) cigarettes, and even the possibility of applying the Zig-Zag name to a new brand of cigarettes.

Zig-Zag Origins Dating to the 1890s

The Zig-Zag brand had strong name recognition, although generally associated with marijuana use in the 1960s and 1970s. In fact, Zig-Zag rolling papers had been in the marketplace since the 1890s. According to lore, the cigarette was conceived by a French soldier during the battle of Sevastopol in the mid-19th century, at a time when tobacco smokers used a pipe. Because the soldier's clay pipe was shattered by a bullet, he rolled some loose tobacco in a scrap of paper torn from a bag of gunpowder. This makeshift way to smoke tobacco was improved upon by Maurice and Jacque Braunstein, who in 1894 perfected the process of interleaving papers in a zig-zag manner to produce a slower, smoother burn; hence they called their papers Zig-Zag. In 1900 the rolling papers gained international fame when they were awarded a gold medal at the Universal Exposition in Paris. UST obtained the distribution rights to Zig-Zag from French manufacturer Bollore in 1938.

North Atlantic faced some difficulties entering the MYO field. It had to contend with counterfeit Zig-Zag cigarette papers, the sale of which the company estimated cost it $10 million in sales and another $7 million in out-of-pocket expenses investigating and litigating counterfeiting claims. North Atlantic also became embroiled in litigation with a competitor, Republic Tobacco, L.P., which sold cigarette papers under such brand names as Drum, Job, and Top. In 1998 Republic launched an incentive program to its wholesale and retail customers. According to North Atlantic, Republic pasted its advertising materials over Zig-Zag point of purchase vendor displays. North Atlantic responded by writing letters to Republic's wholesale and retail customers, maintaining that some of Republic's trade promotions might violate antitrust and unfair competition laws. In one letter, North Atlantic disparaged Republic's rebate program as little more than "smoke and mirrors," and stated that North Atlantic's lawyers had initiated legal action, alleging that Republic had infringed on Zig-Zag's patent and trademark rights. In truth, North Atlantic had not filed suit. On June 30, 1998, Republic was first to file a complaint, claiming unfair competition, defamation, false advertising, and violations of Consumer Fraud Acts, among other charges. North Atlantic countersued on July 15, 1998, claiming that Republic's use of activities such as exclusivity agreements, rebates, incentive programs, and buy-backs violated state and federal antitrust and unfair competition laws.

Republic's antitrust claims were dismissed before discovery was completed. Then over the course of the next few years all of the charges by both parties were dismissed, with the exception of Republic's defamation claim. A four-day trial was conducted in July 2003 in Illinois and a jury ruled in favor of Republic, awarding it $18.6 million, of which $8.4 million was general damages and $10.2 million punitive damages. Later in 2003 the court reduced the award by 60 percent to $7.44 million and Republic accepted the change. But in January 2004 North Atlantic appealed the judgment, including the finding of liability, ensuring that the matter would continue to wend its way through the court system.

Another challenge facing North Atlantic was the diminishing number of tobacco chewers. Not only was the demographic of the core user aging, but moist snuff products were luring away customers. As a result, chewing tobacco sales dropped 4 percent each of the last three years of the 1990s. In 2000, in an effort to concentrate on the growing MYO cigarette market, North Atlantic agreed to sell its four chewing tobacco brands--Beech-Nut, Durango, Trophy, and Havana Blossom--to Stockholm-based Swedish Match and its North American subsidiary for $165 million. Swedish Match was North America's leader in smokeless tobacco sales and owned the top-selling chewing tobacco, Red Man, which controlled about one-third of the premium segment of the chewing tobacco market, compared with Beech-Nut's 12 percent. The deal did not, however, pass muster with the Federal Trade Commission, which ultimately quashed the deal on antitrust grounds.

In 2003 North Atlantic was on the other end of a failed acquisition, as it attempted to enter the cigarette business. In February of that year the company reached an agreement to purchase Star Tobacco, a Star Scientific Inc. subsidiary, for $80 million. Based in Chester, Virginia, Star made deep-discount, low-toxin cigarettes under four brand names using a tobacco-curing process that substantially reduced the number of cancer-causing toxins, nitrosamines, in tobacco leaf. But in July 2003 the parties agreed to terminate the deal, citing "uncertainties in the tobacco industry." Star experienced a 22 percent drop in sales during the first quarter and one of its key markets, Minnesota, increased its excise tax by 35 cents per pack, factors that likely caused North Atlantic to have second thoughts about the deal. Scuttling the acquisition cost North Atlantic $2 million in earnest money it had placed in escrow, as well as another $1.3 million in related expenses.

In 2003 North Atlantic decided to enter the cigarette business, taking advantage of its Zig-Zag brand by launching an all-natural premium cigarette under its name. The idea appeared sound on a number of levels. There was little chance of cannibalizing Zig-Zag papers, since the MYO customer was not the kind to buy packaged brands, let alone higher-priced cigarettes. The Zig-Zag line was being positioned between popular brands such as Marlboro, Camel, and Winstons, and the more expensive brands such as Natural American Spirit. The target customers were people 25 to 45 years old with an average income of $35,000. North Atlantic also hoped to leverage Zig-Zag by focusing on the cigar shops and tobacconists that already sold the rolling papers, eschewing convenience stores where the bulk of cigarette sales were made. Despite these advantages, it remained a difficult time to enter the cigarette business, due in large part to the 1998 settlement of tobacco litigation that cost tobacco companies hundreds of billions of dollars and resulted in the price of cigarettes increasing by 85 percent over the next several years. "In lieu of a share of the damages for past misdeeds," according to Forbes in a June 2004 profile, "newcomers like Zig-Zag must pay deposits into escrow accounts to cover potential tort claims. So far, legal costs to set up these accounts have come to $750,000 for the 22 markets North Atlantic can now sell in. 'Having to deal with each state, whose legislatures are constantly changing laws, is like guerrilla warfare,' says [cigarette division head Lawrence] Wexler." Zig-Zag cigarettes premiered in Dallas, Los Angeles, Miami, and Seattle.

Acquiring Stoker Inc. in 2003

In November 2003 North Atlantic succeeded in completing an acquisition, paying $22.5 million for Dresden, Tennessee-based Stoker, Inc. The addition of Stoker's product lines strengthened both North Atlantic's MYO cigarette business and smokeless tobacco business. Focusing on the value-oriented niche, Stoker was the fifth largest manufacturer and distributor of loose-leaf chewing tobacco, sold under the Stoker, Our Pride, and numerous other brand names. It also offered moist snuff and pipe tobacco brands, as well as five brands of MYO tobacco. Of particular importance was Stoker's strong position in the 16-ounce value-oriented bag category. In addition, Stoker brought with it a catalog operation, devoted mostly to tobacco products.

After acquiring Stoker, North Atlantic informed Louisville city officials that it intended to consolidate its operations, either in its new Dresden facility or in Louisville. Both the city--which was preparing for the departure of Brown & Williamson Tobacco Corp. and a Philip Morris USA plant--and the state of Kentucky were determined to keep North Atlantic's operation and worked together to fashion an incentive package to encourage the company to consolidate its tobacco manufacturing operations in Louisville. In June 2004 North Atlantic agreed to stay, accepting a package worth $3.8 million if the company met hiring goals. North Atlantic's plan was to invest as much as $24.6 million over the next three years as it closed the Tennessee manufacturing operation and incorporated it into the Louisville plant. Only about a dozen employees would remain in Dresden to run the catalog and fulfillment operations.

In little more than a year, North Atlantic had expanded its operation to include a brand of premiere cigarettes and value-priced smokeless tobacco and MYO cigarette products. Yet what was likely to drive growth over the next few years was the MYO business. With taxes continuing to rise on manufactured cigarettes, the number of smokers electing to roll their own was growing steadily. In 1989 MYO cigarettes accounted for just 0.5 percent of the market. By 2004 that number had grown to 2 percent and was continuing to rise.

Principal Subsidiaries: National Tobacco Company, L.P.; North Atlantic Operating Company, Inc.; North Atlantic Cigarette Company, Inc.; National Tobacco Finance Corporation; Stoker, Inc.

Principal Competitors: Conwood Sales Co., L.P.; Swisher International Group Inc.; UST Inc.

Chronology

• Key Dates:
• 1988: National Tobacco Corporation is formed to acquire Lorillard's smokeless tobacco products.
• 1992: North Atlantic Trading Company is formed to acquire Zig-Zag rights.
• 1997: National Tobacco acquires North Atlantic and assumes the North Atlantic name.
• 2003: Stoker, Inc. is acquired.