FTC Clearance Allows Reynolds to Inhale Lorillard for $27 Billion

Reynolds and Lorillard Merger FTC InvestigationThe FTC has announced that it has approved a $27.4 billion merger between cigarette barons Reynolds American Inc. and Lorillard Inc.  However, in order to gain the FTC’s approval, Reynolds and Lorillard had to agreed to divest four of their cigarette brands to Imperial Tobacco Group, PLC.  The FTC’s approval has come after months of uncertainty and speculation as to whether the government would allow the second and third largest U.S. cigarette makers to merge.

Reynolds and Lorillard first announced their planned merger in July 2014.  The deal was to be part of three-way deal in which Reynolds and Lorillard agreed to sell nearly $7.1 billion in cigarette brands to Imperial Tobacco Group.  Those designing the merger purposefully included the $7.1 billion divestiture to Imperial Tobacco Group in hopes that it would ease any concerns that the merger would be anticompetitive.  Even still, the FTC took up a nearly yearlong investigation into the proposed merger.

However, after its nearly yearlong investigation into the merger between Reynolds and Lorillard, the FTC voted to approve the merger.  The major catalyst for the merger’s approval was the proposed divestiture to Imperial Tobacco Group.  According to the FTC’s complaint, without the proposed divestiture to Imperial Tobacco Group, the proposed merger was likely anticompetitive because it would eliminate head-to-head competition between Reynolds and Lorillard in the U.S., and would also likely lead to price increases.

The consent order requires Reynolds to divest to Imperial Tobacco Group four of its established cigarette brands, including Winston Kool, Salem and Maverick.  Imperial Tobacco Group is a UK-based cigarette company that has a presence in approximately 70 countries around the world, but has only a small presence in the U.S.  As a result of acquiring Reynolds’ divested assets, Imperial Tobacco Group will be able to become a more substantial player in the U.S. cigarette market.  In addition to divesting the cigarette brands, Reynolds must also divest to Imperial Tobacco Group the Lorillard manufacturing facilities in Greensboro, North Carolina, and give Imperial Tobacco Group the opportunity to hire most of the existing Lorillard management, staff, and sales force.  The order also requires the newly merged Reynolds-Lorillard to provide Imperial Tobacco Group with shelf space for a short time, and to provide other operational support during the transitional phase.

The merger didn’t receive the unanimous approval of the Commission, however.  Both Commissioners Julie Brill and Joshua D. Wright voted no and issued individual dissenting statements.  Commissioner Brill said she dissented, “because [she was] not convinced that the remedy accepted by the Commission fully resolves the competitive concerns arising from this transaction.”  “I thus have reason to believe that Reynolds’ acquisition of Lorillard, even after the divestitures to Imperial, is likely to substantially lessen competition in the U.S. cigarette market, Brill said.  Continuing on, Brill concluded that “[a]s a result of the Commission’s failure to take meaningful action against this merger, the remaining two major cigarette manufacturers – Altria/Philip Morris and Reynolds – will likely be able to impose higher cigarette prices on consumers.”

Commissioner Wright said he dissented because he didn’t believe an order was even necessary in this case.  According to Commissioner Wright, “I believe the Commission has not met its burden to show that an order is required to remedy any competitive harm arising from the original three-way transaction.  This is because the Imperial transaction is both highly likely to occur and is sufficient to extinguish any competitive concerns arising from Reynolds’ proposed acquisition of Lorillard.”  In conclusion, Commissioner Wright commented “[t]he Commission understandably would like to hold the parties to a consent order that requires them to make the deal along with a handful of other changes. But that is not our role. There is no legal authority for the proposition that the Commission can prophylactically impose remedies without an underlying violation of the antitrust laws. And there is no legal authority to support the view that the Commission can isolate selected components of a three-way transaction to find such a violation.”

The approved merger between Reynolds and Lorillard and accompanying consent order raises certain questions about how the FTC is determining whether and how to approve proposed mergers.  FTC Commissioner Joshua Wright raised a few of these concerns in his dissenting statement, including whether the FTC can impose a consent order in a case where they do not find a violation of the antitrust laws.  The majority found that the deal wouldn’t substantially lessen competition, but chose to impose a consent order anyways.  But does the FTC have the authority to do so?  Commissioner Wright doesn’t think so, and says he can’t find any authority for the FTC to impose a remedy where there is no finding that a merger will substantially lessen competition.  Do you think the FTC should be able to require a consent order where it finds no violation of the antitrust laws?

More on the Reynolds and Lorillard merger.