U.S. Tobacco Companies Merger Fate Is In The Hands Of FTC Now

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Mar 26, 2015
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There are two industries in the United States which are always mired in controversies – tobacco and guns. This time it seems, a small British company is about to spoil a big merger in US. The shareholders of two tobacco majors – Reynolds American Inc. (RAI, Financial) and Lorillard Inc. (LO, Financial) – agreed on a merger, talk of which began in the summer of 2014. However, the merger has had its fair share of trouble. There is a lot riding on it, with both companies having already divested several brands to a third party company. What has got the investors duly worried is that the Federal Trade Commission’s zealous scrutiny may lead to the deal falling through, with both companies losing brands and not gaining anything in return.

Three’s A Crowd

The two tobacco majors have been embroiled in a number of legal issues resulting from antitrust authorities. In fact, the merger is yet to get the final seal of approval from FTC. The FTC has raised a number of questions which revolve around the involvement of a third party — Imperial Tobacco — in the merger.

The possible merger needed the approval of British American Tobacco, as the alliance could have possibly diluted the body’s interests. To ease these antitrust issues, both parties decided to divest a number of their major brands including Blu e-cigs, Kool, and Salem, among others to a UK tobacco maker, Imperial Tobacco. Once the divestment was complete, Imperial Tobacco owned nearly 24% market share in the US tobacco market. However, FTC is worried that Imperial Tobacco may be a smokescreen since investors have lost faith in both - the divested brands as well as The British company itself.

The Deeper Concern

The FTC is probing deeper before it gives the go-ahead to the merger. The regulatory body is not quite convinced that Imperial Tobacco will become a major player in the US tobacco industry. Though the supposedly sweet, new deal for Imperial Tobacco seems good on paper, however, a deeper probe by FTC has revealed that the share of its US brands has in fact depreciated over time. Imperial Tobacco itself was quick to admit that its share has fallen further since the merger of Lorillard-Reynolds was announced.

Analysts are not too gung-ho about the divestiture. According to Cowen Group (COWN, Financial), the brands have together accounted for a 30% loss in market share over a span of four years. However, other major tobacco players like Marlboro and Newport (NEWP, Financial) have almost nearly doubled their share in the last decade.

These recent developments have made antitrust authorities wary about Imperial’s clout to minimize monopolization in the US tobacco industry after the merger is sealed.

Why is the FTC being overly cautious with the merger? The body faced a similar setback in the acquisition deal between Hertz Global Holdings Inc. (HTZ, Financial) and Dollar Thrifty (DTG, Financial). Hertz had divested one of its brands - Advantage Rent a Car – which was then expected to wear the independent competitor crown. However, it declared bankruptcy only a few days later.

Pawn or King?

After the merger, it seems that Imperial Tobacco would lead the e-cigarette market. However, things might not turn out to be all that simple. The company could end up becoming just a pawn in this game for monopoly for which it would pay a heavy price. Also, e-cigarette too is facing stiff societal pressure in the US. The investors sure are not happy with such a raw deal and shares have fallen. This in addition to the fact that the FTC is sceptical of the company’s ability to be a strong competitor, Imperial Tobacco could be the reason that the entire merger comes to naught.