FTC Approves Tobacco Firm Deal
R.J. Reynolds Tobacco Holdings Inc.’s $3-billion takeover of fellow cigarette giant Brown & Williamson Tobacco Corp. was approved by federal antitrust enforcers, who rejected a staff recommendation to block the combination.
By a 4-0 vote, the Federal Trade Commission in Washington cleared the way for R.J. Reynolds, maker of Camel and Salem, to acquire the U.S. unit of British American Tobacco, which makes Lucky Strike and Kool. The new company will be called Reynolds American Inc.
R.J. Reynolds announced the purchase in October, to offset loss of sales to Altria Group Inc.’s Philip Morris unit and 240 discount brands. R.J. Reynolds’ share of the U.S. cigarette market has dropped almost 3 percentage points in the last five years as sales revenue fell 30%.
“We do not believe that the transaction is likely substantially to lessen competition in the U.S. market for cigarettes,” the commissioners said in a statement. “Because in our view this merger is unlikely to lead to substantial lessening of competition in any relevant market, we have closed this investigation.”
R.J. Reynolds shares closed at $65.90, up $1.57, on the New York Stock Exchange, before the decision was announced. The stock rose as high as $69.91 in after-hours trading.
The combination “will enable us to achieve tremendous efficiencies and will greatly enhance the combined companies’ ability to compete effectively in the U.S.,” said Andrew J. Schindler, chief executive of R.J. Reynolds.
The FTC’s staff lawyers had urged the commissioners to challenge the deal. The staff argued that combining R.J. Reynolds, the second-largest U.S. cigarette maker, with No. 3 Brown & Williamson would lead to higher cigarette prices, people familiar with the case said.
Together with No. 1 Philip Morris USA, the companies control more than 80% of U.S. cigarette sales.
The commission said that Brown & Williamson was playing an “increasingly minor role” in the U.S. cigarette market and that none of its brands was a close competitor to any brand made by R.J. Reynolds. Commissioner Pamela Jones Harbour did not participate in the vote.
R.J. Reynolds has said it hopes to save as much as $500 million a year by closing a Brown & Williamson plant that employs 2,100 workers in Macon, Ga., and by shifting production of Kool, Pall Mall and other brands to R.J. Reynolds plants. It also plans to close Brown & Williamson’s 450-employee headquarters in Louisville, Ky.
In September, R.J. Reynolds announced plans to eliminate 2,600 jobs, or 40% of its workforce, to save $1 billion by next year.
“The proposed merger makes a lot of strategic sense and represents an excellent means of solidifying the financial position of RJR,” said Coy Monk, who helps manage $115 million at Charlotte, N.C.-based Myers Limited Partnerships.
R.J. Reynolds, based in Winston-Salem, N.C., agreed to buy Brown & Williamson to create a stronger competitor to Philip Morris, which sells about half the cigarettes in the United States.
On June 10, FTC staff lawyers recommended that the five-member commission authorize a court challenge to the combination. Retailers and wholesalers had complained that the acquisition would give Reynolds American the ability to quash competition from discount cigarette makers, whose market share has grown to almost 12% of the U.S. market from 3% in 1998.
Makers of discount cigarettes have proliferated since 1998, when Philip Morris, R.J. Reynolds, Brown & Williamson and Loews Corp.’s Lorillard cigarette unit agreed to make payments in perpetuity to 46 states that had sued the industry. The settlement, which includes payments of an estimated $206 billion over 25 years, has forced the four companies to raise prices by 73%.
