Reynolds American Inc.’s $27.4 billion purchase of Lorillard Inc. won approval from U.S. antitrust officials on the condition that the companies sell four brands, leaving a market where two manufacturers produce about nine out of every 10 cigarettes sold in the country.
Reynolds, the maker of Camel and Pall Mall cigarettes, was cleared to buy its rival after the Federal Trade Commission accepted its proposal to sell Winston, Kool, Salem and Maverick to Imperial Tobacco Group Plc, a British company that is expanding in the U.S.
“Imperial is positioned to be a sufficiently robust and aggressive competitor,” said the commission, which voted 3-2 to clear the deal.
The merger allows Reynolds to acquire Lorillard’s Newport menthol cigarette brand, which is popular in urban areas, and gain more leverage in the market. Reynolds Chief Executive Officer Susan Cameron aims to carve out $800 million a year in expenses and turn a profit on the deal within the first year. Lorillard also will help her combat industry leader Altria Group Inc., maker of Marlboro cigarettes.
The FTC also is requiring Reynolds to divest Lorillard’s production facilities in Greensboro, North Carolina. Imperial will get the plant, along with the opportunity to hire most of Lorillard’s staff. Reynolds and Lorillard will have to temporarily provide Imperial with retail shelf space as well.
The tobacco business has struggled with shrinking demand in the U.S., spurred by higher taxes, marketing reductions and aggressive anti-smoking campaigns. A clampdown on the industry followed a $206 billion legal settlement with 46 states in 1998 over health costs.
The new company will have annual revenue of more than $11 billion -- almost two-thirds the yearly sales of U.S. market leader Altria -- and operating income of about $5 billion. The combined business will account for almost 33 percent of the U.S. industry, Reynolds has said.
The new company still must contend with eroding tobacco sales brought on by health concerns and smoking restrictions. But even with those challenges, cigarette companies have remained profitable. Altria, Reynolds and Lorillard all boosted adjusted net income last year.
Reynolds shares rose 0.5 percent to $75.43 in New York on Tuesday, while Lorillard climbed 0.2 percent to $72.12.
Separately, Imperial is acquiring the Blu brand from Lorillard, helping preserve competition in the burgeoning market for electronic cigarettes.
Commissioner Julie Brill, who voted against the settlement, said in a statement that the asset sales to Imperial aren’t enough to restore competition and that the deal will lead to higher prices for consumers.
“The commission is betting on Imperial’s ability and incentive to compete vigorously with a set of weak and declining brands,” Brill said. “Imperial’s ability to do so is at best uncertain.”