WINSTON-SALEM, N.C. -- Reynolds American Inc. may have to add a fourth cigarette brand to secure Federal Trade Commission (FTC) approval for its proposed $27.4 billion purchase of Lorillard Inc. to buy top U.S. menthol brand Newport, reported The Winston-Salem Journal.
Reynolds updated its legal disclaimer last week involving the potential purchase to add "the possibility of having to include Doral brand as part of the divestiture transaction." The company also said it "will not be obligated to sell, divest or dispose of any brands or product lines."
The company, however, said it "will not receive any additional purchase price in the event its Doral brand is included in the divestiture."
It said on October 21 that it is responding to a second request for additional information from the FTC. The companies are hopeful the deal will close in the first half of 2015, but some analysts rate the chance of approval at less than 50%, said the report.
The companies agreed on July 15 that as part of the overall deal, they would sell the Kool, Salem and Winston cigarette brands from Reynolds and Maverick from Lorillard, as well as Lorillard's U.S. top-selling blu eCigs electronic cigarette brand, to Imperial Tobacco Group Plc.
Imperial has committed to paying $7.1 billion for the brands, as well as to acquire Lorillard's headquarters and production operations in Greensboro, its plant in Danville, Va., and most of its 2,900 workforce.
The divestiture goal is to bolster Imperial enough to convince the FTC that it would be a competitive No. 3 U.S. manufacturer, raising it from a 3% market share to at least 10.3%. Philip Morris USA would continue to be No. 1 at nearly 51%, while Reynolds would rise to 33% as No. 2 if the proposed deal is approved, the report said.
Although Reynolds only discloses U.S. market share for Camel and Pall Mall, the data in the filing shows that Doral is a sizable financial contributor among the six support brands--Capri, Doral, Kool, Misty, Salem and Winston.
Doral represented $278 million of net sales in 2013, or 3.4% of $8.24 billion. It also represented $114 million of operating income, or 3.6% of $3.13 billion, and $70 million of net income, or 4.1% of $1.72 billion, according to the newspaper.
"Adding Doral to the deal would certainly help the cause and could serve as a tipping point," Roger Beahm, executive director of the Center of Retail Innovation at the Wake Forest School of Business, told the Journal. "While Doral does not have the market share it once did, the brand is still a factor in the midtier, brand-savings segment of the category. Even though it hasn't been as aggressively supported by Reynolds as some of the company's other brands, Doral still enjoys solid brand loyalty."
He concluded, "Losing it would be meaningful to Reynolds. Gaining it would definitely be meaningful to Imperial."
Click here to view the full Winston-Salem Journal report.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.