US: FTC Probes Further into Reynolds-Lorillard Merger

The much-hyped merger between tobacco majors Reynolds American Inc. RAI and Lorillard Inc. LO has been facing several legal issues from antitrust authorities. The Federal Trade Commission (FTC) has yet to give the final nod. Per The Wall Street Journal, the FTC recently raised several questions regarding the third party - Imperial Tobacco plc - involved in the merger.

In July 2014, the owner of Camel brand cigarettes, Reynolds American confirmed talks regarding the merger. The possible takeover required the consent of British American Tobacco, because the agreement may dilute its interests.

In an attempt to ease the antitrust issues, Reynolds and Lorillard divested several of their key brands like blu e-cigs, Winston, Kool, Maverick and Salem to the U.K.-based tobacco maker, Imperial Tobacco. After the divestment, Imperial Tobacco owned almost 24% of market share in U.S. tobacco market.

Nevertheless, the FTC is apprehensive that Imperial may not be able to become a prominent player in the U.S. tobacco industry. The FTC launched a deeper probe after Martin Orlowsky, former head of Imperial's expanded U.S. business, left the company in February 2015 due to differences over management style.

Imperial had been struggling in the U.S. tobacco industry after it took over Commonwealth brands for $1.9 billion in Feb 2007. Moreover, Imperial Tobacco reported that the brands sold by Reynolds and Lorillard have already lost market share over the past three months.

Such developments have made the antitrust authority wary about Imperial's ability to reduce monopolization of power in the U.S. tobacco industry post the Reynolds-Lorillard merger.

The FTC is being extra cautious after it suffered a setback in a similar situation in the Hertz Global Holdings Inc. HTZ-Dollar Thrifty acquisition deal. Hertz had divested its Advantage Rent a Car brand which was expected to become an independent competitor. The brand, however, became bankrupt after a few days.

Meanwhile, the pending merger between Reynolds and Lorillard received shareholders' approval on Jan 28. (Read: Reynolds-Lorillard Merger Vote Confirmed for Jan 28)

The acquisition, if materialized, is expected to consolidate the tobacco industry and increase growth opportunities for Reynolds. The merger will also bring brands like Newport and Camel under one banner. The Zacks Rank #2 (Buy) company is geared to cement its position in the e-cigarette category with the nationwide distribution of its flagship e-cigarette brand Vuse.

Moreover, Lorillard, carrying a Zacks Rank #2 (Buy), commands a solid presence in the profitable e-cigarette market on the back of the blu eCigs and SKYCIG brands. These will help Reynolds gain share in this category. The merger is also expected to pose a threat to the growing market share of another tobacco major, Altria Group Inc. MO. Enditem