Will Reynolds-Lorillard Have to Part With More Brands?

FTC's request for more information renews antitrust speculation

Reynolds Lorillard Imperial Tobacco (CSP Daily News / Convenience Stores)

WINSTON-SALEM, N.C. & GREENSBORO, N.C. -- Reynolds American Inc. and Lorillard Inc. said that the Federal Trade Commission (FTC) has requested additional information from each company in connection with Reynolds American's pending acquisition of Lorillard and divestiture of select brands to Imperial Tobacco Group PLC. The FTC's request has renewed industry speculation over antitrust issues.

In July, Reynolds American and Lorillard entered into an agreement for Reynolds to acquire Lorillard for $27.4 billion. Reynolds also reached an agreement with Imperial Tobacco under which Imperial will purchase the blu electronic cigarette brand; the KOOL, Salem, Winston and Maverick combustible cigarette brands; and other assets and liabilities for $7.1 billion.

The FTC issued this second request under notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act and is a normal part of the regulatory review process, the companies said. The effect of the second request is to extend the waiting period imposed by the HSR Act until 30 days after Reynolds American and Lorillard have substantially complied with the request, unless that period is extended voluntarily by both parties or terminated sooner by the FTC.

Reynolds American and Lorillard said that they will continue to cooperate fully with the FTC as it conducts its review of the proposed acquisition and divestitures.

The companies said that they still expect the transactions to close in the first half of 2015.

Industry observers expect the deal to face intense federal scrutiny over antitrust issues.

"The FTC will be very concerned about competition in this market," David Balto, a Washington attorney and former policy director for the FTC, told Bloomberg in July. "The FTC will want to make sure some level of competition is restored."

There is a chance that just selling off the select brands to Imperial would not be enough, he added.

Analysts have focused on the share of adult smokers under 30 years old as a predictor of future market share positions and trends, said an ABC News report. Currently, the industry distribution of that market is split between three companies but would shift to two companies having about 45% share of adult smokers under 30. Other issues include enhanced market power, especially in the menthol category, in which Newport and Camel are two of the largest players.

CLSA analyst Michael Lavery places the likelihood of the deal being approved as-is at 30%. Others believe there is a 40% chance it will be blocked altogether and other brands may need to be sold to pass muster.

"The process is inherently unpredictable (and possibly political), but we believe the guidelines point to real hurdles to approval," Lavery wrote in an investor note cited by ABC News.

In addition to the expiration of the waiting period under the HSR Act, both the Reynolds American acquisition of Lorillard as well as the Imperial transaction remain subject to shareholder and other approvals, as well as other customary closing conditions.

Reynolds American, Winston-Salem, N.C., is the parent company of R.J. Reynolds Tobacco Co., the second-largest U.S. tobacco company with brands including Camel, Pall Mall, Winston, Kool, Doral, Salem, Misty and Capri; American Snuff Co. LLC, the nation's second-largest manufacturer of smokeless tobacco products, with brands including Grizzly and Kodiak; Santa Fe Natural Tobacco Co. Inc., which manufactures and markets Natural American Spirit 100% additive-free natural tobacco products; Niconovum USA Inc.; Niconovum AB, which market nicotine replacement therapy products in the United States and Sweden, respectively, under the Zonnic brand; and R.J. Reynolds Vapor Co., which makes and markets Vuse e-cigarettes.

Greensboro, N.C.-based Lorillard, through its Lorillard Tobacco Co. subsidiary, is the third largest manufacturer of cigarettes in the United States. Newport, Lorillard's flagship premium cigarette brand, is the top-selling menthol and second-largest-selling cigarette in the United States. Its other brands include Kent, True, Maverick and Old Gold. These five brands include 43 different product offerings which vary in price, taste, flavor, length and packaging. Lorillard, through its other subsidiaries, is also a leading e-cigarette company with the blu eCigs and SkyCig brands.

Imperial Tobacco, Bristol, England, is a multi-national tobacco company. Its brands include Davidoff cigars, cigarettes and pipe tobaccos; West and Gauloises Blondes cigarettes; Montecristo cigars; Golden Virginia hand rolling tobacco; Drum fine-cut tobacco; Rizla rolling papers; and the Puritane e-cigarette brand.