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    FTC Likely to Scrutinize Tobacco Deal

    Combined, new company would still trail Philip Morris, whose brands command about half the U.S. market.

    WASHINGTON -- One day after announcing a blockbuster announcement that to merge U.S. operations, experts are predicting that R.J Reynolds Tobacco Holdings Inc. and British American Tobacco PLC are likely facing an uphill battle in obtaining Federal Trade Commission (FTC) approval of the deal.

    "This is a merger to duopoly and the agency has been very tough on such cases, " David Balto, an attorney with White & Case LLP and former policy director for the Federal Trade Commission's Bureau of Competition, told The Wall Street Journal.

    At the same time, the FTC isn't likely to let U.S. public policy, which favors discouraging smoking through higher prices, color its analysis of the deal, another former FTC official said. Antitrust review is intended in part to keep dominant firms from gaining power to raise prices unchecked.

    "As a general matter, people have applied antirust laws in a neutral fashion," said William Baer, an attorney with Arnold and Porter who was the director of the FTC's Bureau of Competition. "If someone wants to impose a higher tax, or discourage consumption of tobacco, it's a separate public policy question than allowing a cartel or allowing a monopoly."

    The FTC has a long history with BAT, the report said. In 1994, the agency challenged BAT's purchase of American Tobacco Co. The agency reached a settlement that forced BAT and its subsidiary, Brown & Williamson Tobacco Corp., to divest six American tobacco discount brands, three of its full-price brands, and American's only plant, which was located in Reidsville, N.C.

    The FTC at the time argued that the merger would substantially reduce competition in the U.S. cigarette industry and give BAT and other firms ability to collude. That deal combined the third- and fifth-largest of the six major U.S. cigarette manufacturers, and would have left three firms controlling 90% of the market, the FTC said.

    Another provision in the 1994 settlement required BAT to obtain FTC approval before acquiring any interest in a U.S. cigarette manufacturer.

    R.J. Reynolds and rival Brown & Williamson Tobacco Corp. announced a plan Monday to unite their U.S. operations as a way to survive the growing popularity of discounted brands and lawsuits. The deal vastly expands the reach of two tobacco companies that together produce about one of every three cigarettes smoked in the United States. The merged operation will be called Reynolds American Inc., with about $10 billion in annual sales. It will still trail industry giant Philip Morris USA, whose brands command about half the U.S. cigarette market.

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