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WASHINGTON, D.C. — The proposed merger between two of the "Big Three" tobacco companies received its long-awaited clearance from the U.S. Federal Trade Commission (FTC), leaving just one hurdle in its way to a done deal.
The FTC gave its approval to the $27.4-billion merger of Reynolds American Inc. (RAI) and Lorillard Inc. on Tuesday. As part of the clearance, it directed the No. 2 and No. 3 tobacco giants to divest four brands — Winston, Kool, Salem and Maverik — to Imperial Tobacco Group plc. Since that was part of the third leg of the proposed merger, the FTC's approval effectively keeps the RAI-Lorillard deal unchanged.
The commission voted 3-2 in favor of giving the green light to the agreement.
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 RAI 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 RAI and The Altria Group Inc., the remaining two large competitors in an already concentrated industry.
Richmond, Va.-based Altria is the No. 1 tobacco company in the United States. A combined RAI-Lorillard company will take the No. 2 spot, while Imperial is poised to come in at No. 3.
The FTC Order
Also, according to the FTC complaint, new entry would be unlikely to counter the anti-competitive 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 FTC order requires RAI to divest Lorillard's manufacturing facilities in Greensboro, N.C., to Imperial — which is already part of the pending deal — and give Imperial the opportunity to hire most of the existing Lorillard management, staff and sales force.
It also requires the newly merged RAI-Lorillard company to provide Imperial with retail shelf space for a short period, and to provide other operational support during the transition.
The FTC order appoints a monitor to oversee the divestiture. The commission will publish the consent agreement package in the Federal Register and the agreement will be subject to public comment for 30 days, continuing through June 25.
A Three-Way Deal
Under the proposed deal structure, Winston-Salem, N.C.-based RAI will buy Greensboro, N.C.-based Lorillard for $27.4 billion and keep the Newport brand, which represents 90 percent of Lorillard's existing sales and profitability, as well as the True and Old Gold brands. United Kingdom-based British American Tobacco, RAI's largest shareholder, will maintain its 42-percent ownership in RAI through an investment of approximately $4.7 billion.
Once that transaction closes, Imperial Tobacco will pay $7.1 billion for the Winston, Kool and Salem brands from RAI and the Maverick and blu eCig brands from Lorillard. These acquisitions will build on Imperial's existing U.S. portfolio at Commonwealth-Altadis, which currently accounts for a 3-percent share of the U.S. market, principally through the USA Gold brand.
In addition, United Kingdom-based Imperial will acquire Lorillard's infrastructure, which includes the company's manufacturing facility, headquarters offices, research and development facility, and approximately 2,900 employees. Hereafter, Imperial’s new U.S. subsidiary will be known as ITG Brands and be based in Greensboro.
According to a joint press release issued by RAI and Lorillard, the closing of the acquisition and related transactions remains subject to certain other conditions. The most significant condition 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 Co., an indirect subsidiary of RAI, and Lorillard Tobacco Co., a subsidiary of Lorillard.
Under the terms of the court's remedial order entered in 2006, before R.J. Reynolds can transfer cigarette brands to Imperial Tobacco'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 companies explained.
The motion is unopposed, the matter has been briefed, and the court held a hearing with all parties on May 19.