Feds review Reynolds’ deal to buy Lorillard

Associated Press

RICHMOND, Va.

Federal regulators are putting Camel cigarette maker Reynolds American Inc.’s planned $25 billion takeover of rival Newport maker Lorillard Inc. under the microscope.

The nation’s second-biggest tobacco company said Friday that the Federal Trade Commission has asked for additional information as part of an antitrust review of the deal.

The move announced in July to combine two of the nation’s oldest and biggest tobacco companies would create a formidable No. 2 to rival Altria Group Inc., owner of Marlboro maker Philip Morris USA. It also would create a new major player in the country’s tobacco market — the U.K.’s Imperial Tobacco Group, which would triple its share of the U.S. cigarette market by buying some of the companies’ other brands for $7.1 billion.

The deal, which Reynolds and Lorillard value at about $27 billion including debt, is expected to close in the first half of 2015 but faces further scrutiny over how the combination would affect competition in a highly competitive market and cigarette prices, which have grown about 5 percent annually in the past 10 years.

Once complete, the new company, which will remain based in Winston-Salem, N.C., is projected to have more than $11 billion in revenue and claim about a 34 percent share of the U.S. retail cigarette market. It also would be a powerhouse in menthol cigarettes, which are becoming a bigger part of the business and gives the combined company some breathing room even as people smoke fewer cigarettes every year. The company, however, will sell off Lorillard’s dominant Blu e-cig brand to focus on Reynolds’ rechargeable Vuse e-cigarette brand, which expanded nationally in June.

While the companies did not say what specific information regulators have requested as part of the review called a second request, federal merger guidelines place importance on future competition.

Analysts have focused specifically on the share of adult smokers under 30 years old as a predictor of future market share positions and trends. Currently, the industry distribution of that market is split between three companies but would shift to two companies having about 45 percent share of adult smokers under 30.

Other issues include enhanced market power, particularly in the menthol category, in which Newport and Camel are two of the largest players. On its own, Newport accounts for 37 percent of the menthol segment.