Reynolds, Lorillard Must Sell Four Brands To Gain FTC’s Approval Of $27.4B Mega-Cigarette Merger

(Rosalyn Davis)

You may recall that last July the No. 2 and No. 3 cigarette brands in the country announced thy were planning to go all in on a $27.4 billion merger. This week the two companies received the blessing from federal regulators, as long as they divest four cigarette brands to a British-based company.

The Federal Trade Commission announced Tuesday that betrothed tobacco companies R.J. Reynolds American Inc. – the maker of Camel and Pall Mall – and Lorillard – the maker of Newport cigarettes – have agreed to sell a total of four brands to settle regulator’s concerns that the mega-merger would be anticompetitive.

The proposed purchase by Reynolds would create a formidable rival for current top cigarette company Altria Group, the maker of Marlboros. Altria currently accounts for 46% of the U.S. cigarette market, while Reynolds has about 25% and Lorillard about 12% of the market.

Under the proposed divesture order [PDF], Reynolds will divest three brands – Salem, Kool and Winston – and Newport will divest its Maverick brand to Imperial Tobacco Group.

Imperial Tobacco Group currently has a competitive presence in about 70 counties, but a relatively small presence in the U.S. By taking over the four brands, the company will be a more substantial competitor for the new Reynolds and current cigarette leader Altria, and become the third-largest cigarette maker in the U.S.

According to the FTC’s complaint [PDF], the merger raised significant competitive concerns as it had the potential to eliminate current and emergent competition for Reynolds and Lorillard in the U.S. market.

Additionally, the FTC determined that without divesture there was a likelihood that the merger would unilaterally raise prices, and that coordinated interaction would occur between Reynolds and Altria.

In addition to divesting the four cigarette brands, Reynolds must divest to Imperial the Lorillard manufacturing facilities in North Carolina and provide Imperial the opportunity to hire most of the existing management, staff and salesforce.

The newly merged companies must also provide Imperial with retail shelf space for a short period of time and to provide other operational support during the transition.

The FTC’s decision to require Reynolds and Lorillard to divest several brands doesn’t come as much of a surprise, as the two companies attempted to proactively escape regulatory scrutiny by proposing they would sell brands to Imperial.

At the time of the merger announcement, the companies planned to sell Kool, Salem and blu eCigs brand for $7.1 billion.

The proposed merger is expected to give Reynolds over $11 billion in revenue and approximately $5 billion in operating income to invest in innovation, consolidate production, sales and overhead – all of which worried health advocates.

“There’s serious concern that a merged company with increased resources poses a real threat to increased tobacco marketing to America’s kids,” says Matthew Myers, president of the Campaign for Tobacco-Free Kids said last July. “This is a marriage of Joe Camel and Newport — two brands that have played a major role in youth tobacco use.”

The Food and Drug Administration has put emphasis on curbing teen smoking this year with its first ever anti-smoking campaign aimed at teens. The $115 million multimedia education campaign aims to show youth the true costs and health consequences of smoking by focusing on how tobacco affects one’s outward appearance.

FTC Requires Reynolds and Lorillard to Divest Four Cigarette Brands as a Condition of $27.4 Billion Merger [Federal Trade Commission]