By Brent Kendall And Tripp Mickle
U.S. antitrust enforcers on Tuesday cleared Reynolds American
Inc. to proceed with its $25 billion acquisition of Lorillard Inc.,
ending months of uncertainty about whether the government would
allow the second- and third-largest U.S. cigarette makers to
combine.
Reynolds and Lorillard announced their planned marriage last
July, part of a three-way deal in which the companies agreed to
sell $7.1 billion in cigarette brands and other assets to
U.K.-based Imperial Tobacco Group PLC. The move was designed to
head off concerns that the merger would hurt competition and lead
to higher prices.
The Federal Trade Commission, which spent nearly a year
scrutinizing the deal, on Tuesday said it was satisfied the
divestitures would restore market competition that would have been
lost through the merger, with Imperial "positioned to be a
sufficiently robust and aggressive competitor" to a combined
Reynolds-Lorillard and industry leader Altria Group Inc.
The deal will reshape and further consolidate the tobacco
industry, with two companies controlling more than 80% of the $100
billion U.S. market.
Altria, owner of top brand Marlboro, leads the pack with an
estimated 47% share. Reynolds, which owns the Camel and Pall Mall
brands, will boost its market share to an estimated 34% by
acquiring Lorillard and its Newport brand, the top-selling menthol
cigarette. In January, shareholders at Reynolds, Lorillard and
Imperial approved the deals.
In a joint release, Reynolds and Lorillard said they are
awaiting formal approval from federal district court before they
can close the acquisition. The companies are subject to a nearly
decade-old civil judgment in a government racketeering case that
requires they obtain court permission before they can divest
cigarette brands.
Reynolds and Lorillard last month filed an unopposed motion with
U.S. District Judge Gladys Kessler in Washington, D.C., seeking
authorization for the sale, but the judge hasn't yet granted the
motion.
The companies said they asked the court to "rule expeditiously,
and they are confident that the acquisition and related
transactions will close by the end of June 2015."
Reynolds expects to have more than $11 billion in revenue and
about $5 billion in operating income after the acquisition.
Adding the Newport brand to Reynolds' portfolio is expected to
boost the number of retailers that sign up for the company's
discount program, known as Reynolds' Every Day Low Price agreement.
An increase in retailer participation should help Reynolds control
pricing and improve distribution for all of its brands, according
to analysts at Wells Fargo.
Newport also is expected to boost Reynolds' geographic
footprint. The brand is strong in the Northeast and urban areas
while Reynolds' top-selling brand, Camel, is strong in the West and
rural areas.
Imperial Tobacco will become the new No. 3 player in the U.S.,
with about a 10% market share, after buying the divested Reynolds
and Lorillard assets. The British firm is acquiring Blu
e-cigarettes and four cigarette brands--Maverick, Kool, Salem and
Winston--that have been losing market share in the U.S. for
years.
Imperial told shareholders it plans to invest significantly to
revive brands, giving it a new shot in a U.S. market where it has
struggled previously.
The FTC said Imperial, which didn't immediately reply to request
for comment, will have a portfolio of brands across different price
points, making its business more important to retailers.
Not everyone at the FTC was convinced the asset sales to
Imperial would preserve competition. Commissioner Julie Brill
dissented from the FTC's decision to allow the deal, saying it is
uncertain that Imperial will have the ability and incentive "to
compete vigorously with a set of weak and declining brands." By
allowing the merger, Altria and Reynolds "will likely be able to
impose higher cigarette prices on consumers," she said.
The FTC's approval clears the last high hurdle for the deal.
During the government merger review, the FTC interviewed
competitors, retailers and wholesalers about how combining Reynolds
and Lorillard would affect cigarette pricing and competition.
Investigators also focused on Imperial's ability postmerger to
replace the competition previously provided by Lorillard.
The market had been uncertain the merger would receive FTC
approval. For much of the past year, there was a significant spread
between Lorillard's stock price and the closing price of the
deal.
Write to Brent Kendall at brent.kendall@wsj.com and Tripp Mickle
at Tripp.Mickle@wsj.com
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