Reynolds American (RAI) and Lorillard said yesterday that the US Federal Trade Commission (FTC) had voted to accept a proposed consent agreement, authorizing RAI to close its proposed $27.4 billion acquisition of Lorillard.
The FTC clearance is subject to certain conditions, most of which the companies had previously agreed to as part of the related divestiture transactions announced in July 2014.
In a story for Bloomberg News, Duane Stanford and David McLaughlin said that the approval by the FTC antitrust officials, who voted 3-2 in favor of the agreement, would create a market where two manufacturers produced about nine out of every 10 cigarettes sold.
They said that RAI’s CEO Susan Cameron aimed to ‘carve out $800 million a year in expenses and turn a profit on the deal within the first year’.
In a statement, the FTC said that it had voted to accept for public comment a settlement with RAI to resolve the likely anticompetitive effects of its proposed acquisition of Lorillard. The settlement would allow the acquisition to move forward subject to large divestitures by the parties to Imperial Tobacco Group.
Under the settlement, RAI would buy Lorillard for $27.4 billion and then immediately divest certain assets from RAI and Lorillard to Imperial in a second, $7.1 billion transaction.
At the end of both transactions, RAI would own Lorillard’s Newport brand, while Imperial would own three former RAI brands, Winston, Kool and Salem, as well as Lorillard’s Maverick and e-cigarette Blu brands, and Lorillard’s corporate infrastructure and manufacturing facility.
In a separate press note, the FCTC said that its order required that RAI divested to Imperial the Lorillard manufacturing facilities in Greensboro, North Carolina, and provided Imperial with the opportunity to hire most of the existing Lorillard management, staff, and salesforce. It required also 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. Its order appointed a monitor to oversee the divestiture.
The FTC said in its statement that it believed that RAI’ proposed acquisition of Lorillard was likely to lessen substantially competition on the US market for combustible cigarettes. It concluded, however, that the parties’ proposed post-merger divestitures to Imperial would be effective in restoring competition to the market and that it therefore approved the divestitures as part of a consent order.
There were two dissenting statements; one by FTC commissioner Joshua D. Wright (https://www.ftc.gov/system/files/documents/cases/150526reynoldswrightstatement.pdf) and one by commissioner Julie Brill (https://www.ftc.gov/system/files/documents/cases/150526reynoldsbrillstatement.pdf)
Meanwhile, RAI and Lorillard said in a note posted on RAI’s website that the closing of the acquisition and related transactions remained subject to certain other conditions described in the Joint Proxy Statement/Prospectus dated December 22, 2014. ‘The remaining significant condition to closure of the transaction is approval from the federal district court overseeing United States v. Philip Morris USA Inc., et al,’ it said. ‘This case was brought by the U.S. Department of Justice in 1999 against several tobacco companies, including R.J. Reynolds Tobacco Company, an indirect subsidiary of RAI, and Lorillard Tobacco Company, a subsidiary of Lorillard, Inc.
‘Under the terms of the court’s remedial order entered in 2006, before R.J. Reynolds can transfer cigarette brands to Imperial Tobacco’s ITG Brands, LLC subsidiary, the court must enter an order finding that ITG Brands intends to and is capable of complying with the court’s remedial order in relation to the cigarette brands that ITG Brands is purchasing. The motion is unopposed, the matter has been briefed, and the court held a hearing with all parties on May 19, 2015.
‘The companies have requested that the court rule expeditiously, and they are confident that the acquisition and related transactions will close by the end of June 2015.’