The proposed acquisition of Lorillard Inc. (NYSE:LO) by Reynolds American, Inc. (NYSE:RAI) is facing a hurdle as the top officials of anti-trust body investigate the regulatory opposition, Bloomberg reported.
The Hurting Competition Spirit
A few staff members of Federal Trade Commission told Bloomberg that if Reynolds acquires Lorillard, the Camel cigarettes maker, in the $25 billion deal, the spirit of competition will be in jeopardy. This is considered as the merger of second and third number companies in the tobacco market. Such a tie up would create a scenario in the market where two companies will alone have a control over 80% or more of the sales.
The resolving solution
Both the companies, in turn, have proposed to sell a few brands to Imperial Tobacco Group PLC (ADR) (OTCMKTS:ITYBY) in order to solve this anti-trust issue. Reynolds also has an agreement to give away the brands like blu eCigs, Winston, Salem and Kool to Imperial, for an amount of $7.1 billion. This will enhance the market share of Imperial from 2.5% to 10% in the U.S.
Convincing FTC not easy
The representatives of these two companies are pressing aforementioned solution in meetings with FTC commissioners this week. These commissioners will give their final verdict to this deal. In case, they are not convinced over the deal, they might decide to sue this merger and block it on the grounds of anti-trust. It is still not known whether the companies have already presented this solution to the FTC or they are looking for more divestitures.
The struggling tobacco industry in the U.S.
The industry has suffered losses because of increase in the taxes as well as marketing reductions. Aggressive campaigns regarding anti-smoking are also hurting the tobacco industry. By purchasing Lorillard, Reynolds will be able to take on other companies in the U.S. market, especially the king of market, Altria Group Inc (NYSE:MO). The objective of Reynolds would be to gain a popular line of Newport menthol, which is quite renowned in urban regions.