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From Antitrust Law Daily, May 26, 2015

Reynolds, Lorillard to divest cigarette brands to settle FTC merger challenge

By Edward L. Puzzo, J.D.

Cigarette name brands Winston, Kool, Salem, and Maverick must be divested by tobacco companies Reynolds and Lorillard to settle FTC charges that their proposed $27.4 billion merger would likely be anticompetitive, the agency announced today (In the Matter of Reynolds Inc. and Lorillard, Inc., File No. 141-0168).

The proposed order requires the divestiture of the four established brands to British firm Imperial, a tobacco manufacturer with a competitive presence in about 70 countries, but a comparatively small presence in the United States. Under the order, Lorillard’s manufacturing facilities in Greensboro, North Carolina would also have to be divested to Imperial, and Imperial would have to be provided the opportunity to hire most of the existing Lorillard management, staff, and sales force. It also requires the newly merged Reynolds and Lorillard to provide Imperial with retail shelf space for a short period and to provide other operational support during the transition.

Reynolds—marketer of best-selling brands Camel and Pall Mall, as well as Winston, Kool, and Salem—and Lorillard—marketer of Newport, the best selling menthol brand, as well as Maverick—-are the second-largest and third-largest U.S. cigarette makers, behind industry leader Altria Group Inc., which sells Marlboro cigarettes. With the acquisition of the divested assets, Imperial would become a more substantial competitor in the United States.

Without the divestiture to Imperial, the proposed merger raises significant competitive concerns by eliminating current and emergent, head-to-head competition between Reynolds and Lorillard in the U.S. market for traditional combustible cigarettes, the FTC complaint charged. The merger also increases the likelihood that the merged firm would unilaterally raise prices, and that coordinated interaction would occur between Reynolds and Altria, the remaining two large competitors in an already concentrated industry. According to the complaint, new entry would be unlikely to counter the anticompetitive effects of the proposed merger. Potential new competitors would face significant barriers to entry, including declining demand, regulatory barriers, the large investment required to promote cigarette brands, restrictions on advertising, and difficulty in obtaining shelf space.

The Commission vote to issue the complaint, to accept the proposed consent order for public comment, and to issue a Commission Statement was 3-2, with Commissioners Julie Brill and Joshua D. Wright voting no and issuing dissenting statements.

The FTC will publish the consent agreement package in the Federal Register shortly. The agreement will be subject to public comment for 30 days, beginning today and continuing through June 25, 2015, after which the Commission will decide whether to make the proposed consent order final. Comments can be filed electronically or in paper form by following the instructions in the “Supplementary Information” section of the Federal Register notice.

Companies: Reynolds American, Inc.; Lorillard, Inc.; Imperial Tobacco Group PLC

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