Markets Wired

Tobacco companies Reynolds American Inc. and Lorillard Inc. have agreed to divest four cigarette brands to Imperial Tobacco Group to settle Federal Trade Commission charges that their proposed $27.4 billion merger would likely be anticompetitive.

Reynolds markets two of the best-selling cigarettes in the country, Camel and Pall Mall, as well as Winston, Kool, and Salem. Lorillard’s flagship brand, Newport, is the best-selling menthol cigarette, which it markets along with other brands including Maverick. Reynolds and Lorillard are the second- and third-largest U.S. cigarette makers, behind industry leader Altria Group Inc., which sells Marlboro cigarettes.

According to the FTC complaint, without the divestiture to Imperial, the proposed merger raises significant competitive concerns by eliminating current and emergent, head-to-head competition between Reynolds and Lorillard in the U.S. market for traditional combustible cigarettes. It also increases the likelihood that the merged firm would unilaterally raise prices, and that coordinated interaction would occur between Reynolds and Altria, the remaining two large competitors in an already concentrated industry.

Also, according to the complaint, new entry would be unlikely to counter the anticompetitive effects of the proposed merger. Potential new competitors would face significant barriers to entry, including declining demand, regulatory barriers, the large investment required to promote cigarette brands, restrictions on advertising, and difficulty in obtaining shelf space. 

The proposed order requires Reynolds to divest to Imperial four established cigarette brands: Winston, Kool, Salem, and Maverick. Imperial is an international tobacco manufacturer with a competitive presence in about 70 countries, but a comparatively small presence in the United States. With the acquisition of the divested assets, Imperial would become a more substantial competitor in the United States.

The Commission’s order requires not only that the brands be divested, but also that  Reynolds divest to Imperial the Lorillard manufacturing facilities in Greensboro, North Carolina, and provide Imperial with the opportunity to hire most of the existing Lorillard management, staff, and salesforce. It also requires 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. The Commission’s order also appoints a monitor to oversee the divestiture. Details about the divestiture are included in the analysis to aid public comment for this matter.

The Commission vote to issue the complaint and accept the proposed consent order for public comment and to issue a Commission Statement was 3-2, with Commissioners Julie Brill and Joshua D. Wright voting no and issuing dissenting statements. The FTC will publish the consent agreement package in the Federal Register shortly. The agreement will be subject to public comment for 30 days, beginning today and continuing through June 25, 2015, after which the Commission will decide whether to make the proposed consent order final. Comments can be filed electronically or in paper form by following the instructions in the “Supplementary Information” section of the Federal Register notice.

NOTE: The Commission issues an administrative complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of up to $16,000 per day.

The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust{at}ftc{dot}gov, or write to the Office of Policy and Coordination, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave., NW, Room CC-5422, Washington, DC 20580. To learn more about the Bureau of Competition, read Competition Counts. Like the FTC on Facebook, follow us on Twitter, and subscribe to press releases for the latest FTC news and resources.