NEW YORK (The Deal) -- Reynolds American (RAI) and Lorillard (LO) said on Tuesday they expect to close their $27.4 billion merger by the end of June after agreeing to antitrust conditions required by the Federal Trade Commission.
The FTC announced late Tuesday that the companies must divest four cigarette brands to Imperial Tobacco Group (ITYBY). The divestiture terms are largely along the lines of those the companies proposed when they announced their merger plans in July 2014. The brands to be divested are Reynolds' Winston, Kool and Salem, and Lorillard's Maverick.
The conditions address FTC charges that the proposed merger would likely be anticompetitive. The FTC noted that Reynolds markets two of the best-selling cigarettes in the country, Camel and Pall Mall, as well as Winston, Kool, and Salem. Lorillard's flagship brand, Newport, is the best-selling menthol cigarette.
Reynolds and Lorillard are the second- and third-largest U.S. cigarette makers, behind industry leader Altria Group (MO), which sells Marlboro cigarettes. Those three producers account for roughly 90% of all cigarette sales, according to the FTC. Imperial and Liggett Group (VGR) , another small producer, have only 3% market shares each. All other producers have market shares of 1% or less.
According to the FTC complaint, without the divestiture to Imperial, the proposed merger would likely eliminate 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 Reynolds and Altria, as the remaining two large competitors in an already concentrated industry, would engage in coordinated interaction.
Imperial is an British multinational tobacco manufacturer with a competitive presence in about 70 countries, but a relatively small presence in the U.S. By acquiring the designated assets, Imperial would become a more substantial competitor here, the FTC said.
In addition to the designated brands, the FTC is requiring Reynolds to sell Imperial the Lorillard manufacturing facilities in Greensboro, N.C., and to provide Imperial with the opportunity to hire most of the existing Lorillard management, staff, and sales team. It also requires the newly merged Reynolds and Lorillard to provide Imperial with retail shelf space for five months after the spinoff and to provide other operational support during the transition.
Reynolds must complete the divestiture on the same day it acquires Lorillard.
The FTC order is subject to a 30-comment period that runs through June 25, after which the commission will review the submissions and decide whether to make the proposed consent order final.
The settlement largely matches the companies' proposed settlement, which called for the spinoff of Winston, Kool and Salem, as well as Lorillard's discount Maverick brand. The merger agreement also required Reynolds to include its Doral brand in the divestiture package if the FTC demanded it, but the commission didn't include that in the package.
Although the companies also proposed to shed Lorillard's blu e-cigarette line, the settlement does not address e-cigarettes.
The brands to be divested have a combined share of approximately 7% of the total U.S. cigarette market. The FTC said the designated divestiture package, including the nationally recognized Winston and Kool brands, "provides Imperial an opportunity to rapidly increase its competitive significance in the U.S. market."
The FTC said, "Imperial will shift immediately from being a small regional producer with limited competitive influence on the larger firms to become a national competitor with the third-largest cigarette business in the market."