FTC Clearance of Reynolds-Lorillard Merger Expected Any Day Now

WASHINGTON, D.C. — The Federal Trade Commission (FTC) could rule on the $27.4-billion merger proposal between Reynolds American Inc. (RAI) and Lorillard Inc. as early as next week.

According to the Wall Street Journal, people familiar with the deliberations said the companies are expected to receive antitrust clearance for their planned merger before June 1.

RAI and Lorillard have a financial interest in obtaining antitrust clearance and closing their deal by this date, according to the news outlet. If they seal the deal by then, they can save the roughly $240 million that Lorillard would owe its shareholders in quarterly dividend payments if it remains a separate company after that date.

The tobacco companies and the FTC have spent several weeks finalizing a settlement to allow the merger, with conditions attached that are intended to protect market competition, the report added.

The Wall Street Journal reported in early April that key figures within the FTC preferred to reach a settlement instead of attempting a lawsuit to block the deal. Others at the commission oppose the merger and it is possible at least one FTC commissioner will dissent from the settlement, according to people familiar with the matter.

Under the proposed deal structure, Winston-Salem, N.C.-based RAI will buy Greensboro, N.C.-based Lorillard for $27.4 billion and keep the Newport brand, which represents 90 percent of Lorillard's existing sales and profitability, as well as the True and Old Gold brands. United Kingdom-based British American Tobacco, RAI's largest shareholder, will maintain its 42-percent ownership in RAI through an investment of approximately $4.7 billion.

Once that transaction closes, Imperial Tobacco will pay $7.1 billion for the Winston, Kool and Salem brands from RAI and the Maverick and blu eCig brands from Lorillard. These acquisitions will build on Imperial's existing U.S. portfolio at Commonwealth-Altadis, which currently accounts for a 3-percent share of the U.S. market, principally through the USA Gold brand.

In addition, United Kingdom-based Imperial will acquire Lorillard's infrastructure, which includes the company's manufacturing facility, headquarters offices, research and development facility, and approximately 2,900 employees. Hereafter, Imperial's new U.S. subsidiary will be known as ITG Brands and be based in Greensboro.

The three-way deal would elevate Imperial to the No. 3 tobacco company in the United States. Many industry observers have questioned whether Imperial would be able to compete behind No. 1 Altria and the RAI-Lorillard combined company at No. 2.

FTC approval is the last major hurdle for the merging companies, but they do have one other outstanding issue to resolve. A nearly decade-old civil judgment in a government racketeering case against leading tobacco companies requires that Reynolds and Lorillard obtain court permission before they can divest cigarette brands to Imperial, which wasn't a party to the case, according to the WSJ.

The companies last month filed a motion with U.S. District Judge Gladys Kessler in Washington, D.C., seeking authorization for the sale. The federal government didn't oppose the request, but Kessler hasn't yet granted the motion.

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