Tobacco deal draws more FTC scrutiny

Reynolds, Lorillard vow cooperation

Regulators have asked for additional information from Reynolds American Inc. and Lorillard Inc., the U.S. tobacco companies that agreed last month to a $25 billion merger.

Each company got a so-called second request from the Federal Trade Commission, according to a statement from the cigarette makers Friday. Reynolds and Lorillard said they would cooperate with the antitrust agency and still expect the transaction to be completed in the first half of next year.

Reynolds' acquisition of Lorillard, announced July 15, would leave the 400-year-old U.S. tobacco industry with two competitors controlling 90 percent of the market. The companies attempted to soothe antitrust concerns by agreeing to sell brands such as Kool and Blu for $7.1 billion to Imperial Tobacco Group Plc, a British company that's pushing deeper into the U.S. industry. Altria Group Inc. remains the market leader.

"Everyone is well aware the transaction poses significant antitrust concerns," said Darren Tucker, an antitrust lawyer at Bingham McCutchen LLP in Washington. "The parties have made a good faith effort to resolve those concerns with a divestiture package, but the FTC needs time to review the proposal."

The request for more information was expected and gives the FTC more time to vet the transaction after an initial 30-day review, he said.

While Lorillard's stock has climbed 17 percent this year through Thursday, it continues to trade below the bid price, a sign investors are concerned the deal won't close. Shares of the Greensboro, N.C.-based company rose 38 cents to close Friday at $59.70 in New York. Reynolds shares, up 16 percent this year, rose 47 cents to $58.47.

Decades of anti-tobacco health campaigns have hurt cigarette demand and put pressure on the industry to consolidate. Acquiring Lorillard, the U.S. industry's third-largest competitor, would help Winston-Salem, N.C.- based Reynolds cope with the slowdown and give it the Newport menthol line, which is popular in urban areas.

The FTC's investigation will focus on whether the proposed sale will restore competition and whether Imperial Tobacco will become a viable competitor against the combined company, according to Tucker. The agency's review should take another six to nine months, he said.

Reynolds, the maker of Camel and Pall Mall cigarettes, agreed to pay cash and stock valuing Lorillard at $68.88 a share. British American Tobacco Plc plans to fund $4.7 billion of the transaction, letting it maintain a 42 percent stake in Reynolds.

The combined company will account for almost 33 percent of the U.S. industry, Reynolds said last month. That leaves the U.S. with two competitors -- Reynolds and Altria -- selling nine out of every 10 cigarettes. Imperial said its market share will more than triple to 9.5 percent from 2.5 percent.

Despite shrinking industry sales, the companies have remained profitable, with Altria, Reynolds and Lorillard all boosting net income last year.

Unlike with other industries, the prospect of a deal leading to higher cigarette prices may not alarm U.S. authorities, said Philip Gorham, an analyst for Morningstar Inc. in Amsterdam. They're already trying to get Americans to smoke less.

"There's no lobby group shouting bloody murder if smokers have to pay more for cigarettes, and there's a public-health benefit," he said. "This is not the remit of the antitrust regulators, of course, but you have to think it's in the back of their mind when they are looking at this."

Business on 08/30/2014

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