WINSTON-SALEM, N.C., & GREENSBORO, N.C. -- Reynolds American Inc. and Lorillard Inc. late Tuesday announced that the U.S. Federal Trade Commission (FTC) has accepted, by a three-to-two vote, a proposed consent agreement authorizing Reynolds American to close its proposed acquisition of Lorillard.
As reported in a 21st Century Smoke/CSP Daily News Flash, the proposed order requires Reynolds to divest to Imperial Tobacco Group four established cigarette brands—Winston, Kool, Salem and Maverick—to settle FTC charges that their proposed merger would likely be anticompetitive.
Click here to view the complaint. And click here to view the agreement containing the consent order.
“The merging parties chose to present this acquisition to the commission with a proposed divestiture aimed solely at securing our approval of the acquisition,” the FTC wrote. “As proposed, Reynolds will purchase Lorillard for $27.4 billion and then immediately divest certain assets from both Reynolds and Lorillard to Imperial Tobacco Group plc in a second $7.1-billion transaction. At the end of both transactions, Reynolds will own Lorillard’s Newport brand and Imperial will own three former Reynolds’ brands, Winston, Kool and Salem, as well as Lorillard’s Maverick and e-cigarette blu brands, and Lorillard’s corporate infrastructure and manufacturing facility.”
Imperial, based in Bristol, England is an international tobacco manufacturer with a competitive presence in about 70 countries, but a comparatively small presence in the United States. With the acquisition of the divested assets, Imperial would become a more substantial competitor in the United States.
Winston-Salem, N.C.-based Reynolds markets two of the best-selling cigarettes in the country, Camel and Pall Mall, as well as Winston, Kool and Salem. Greensboro, N.C.-based Lorillard’s flagship brand, Newport, is the best-selling menthol cigarette, which it markets along with other brands including Maverick. Reynolds and Lorillard are the second- and third-largest U.S. cigarette makers (with approximately 26% and 15% market share, respectively), behind industry leader Altria Group Inc., Richmond, Va., which sells Marlboro cigarettes (with approximately 51% market share). Other players in the market include Liggett and Imperial, each with approximately 3% of the market, and about 50 other small players focused mainly on discount or regional business, the FTC said.
According to the FTC complaint, without the divestiture to Imperial, the proposed merger raises significant competitive concerns by eliminating current and emergent, head-to-head competition between Reynolds and Lorillard in the U.S. market for traditional combustible cigarettes. It also increases the likelihood that the merged firm would unilaterally raise prices, and that coordinated interaction would occur between Reynolds and Altria, the remaining two large competitors in an already concentrated industry.
Also, according to the complaint, a new entry would be unlikely to counter the anticompetitive effects of the proposed merger. Potential new competitors would face significant barriers to entry, including declining demand, regulatory barriers, the large investment required to promote cigarette brands, restrictions on advertising and difficulty in obtaining shelf space.
The proposed order requires Reynolds to divest to Imperial the four cigarette brands, and it also requires that Reynolds divest to Imperial the Lorillard manufacturing facilities in Greensboro, N.C., and provide Imperial with the opportunity to hire most of the existing Lorillard management, staff and salesforce. It also requires the newly merged Reynolds and Lorillard to provide Imperial with retail shelf space for a short period, and to provide other operational support during the transition.
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The FTC’s order also appoints a monitor to oversee the divestiture.
For more details, click here to read the Analysis of Agreement Containing Consent Order to Aid Public Comment in the Matter of Reynolds American Inc. and Lorillard Inc.
Commissioners Julie Brill and Joshua D. Wright voted no on the consent order and issued dissenting statements. Neither believe that the deals will solve the anti-competitive situation.
“The commission is betting on Imperial’s ability and incentive to compete vigorously with a set of weak and declining brands. … Imperial’s ability to do so is at best uncertain. I thus have reason to believe that Reynolds’ acquisition of Lorillard, even after the divestitures to Imperial, is likely to substantially lessen competition in the U.S. cigarette market. As a result of the commission’s failure to take meaningful action against this merger, the remaining two major cigarette manufacturers—Altria/Philip Morris and Reynolds—will likely be able to impose higher cigarette prices on consumers,” said Brill.
The agreement is subject to public comment for 30 days, beginning May 26, 2105, and continuing through June 25, 2015, after which the FTC will decide whether to make the proposed consent order final.
The closing of the acquisition and related transactions remains subject to certain other conditions described in the Joint Proxy Statement/Prospectus dated Dec. 22, 2014, Reynolds and Lorillard said. The remaining significant condition to closure of the transaction is approval from the federal district court overseeing United States v. Philip Morris USA Inc., et al. This case was brought by the U.S. Department of Justice in 1999 against several tobacco companies, including R.J. Reynolds Tobacco and Lorillard Tobacco.
Under the terms of the court’s remedial order entered in 2006, before Reynolds can transfer cigarette brands to Imperial’s ITG Brands LLC subsidiary, the court must enter an order finding that ITG Brands intends to and is capable of complying with the court’s remedial order in relation to the cigarette brands that ITG Brands is purchasing.
The motion is unopposed, the matter has been briefed, and the court held a hearing with all parties on May 19, 2015.
The companies have requested that the court rule expeditiously, and they are confident that the acquisition and related transactions will close by the end of June 2015, they said.
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