FTC Scrutinizing Imperial's Part in RAI-Lorillard Merger

WASHINGTON, D.C. — Federal officials continue to review the pending merger between Reynolds American Inc. (RAI) and Lorillard Inc., with a focus on Imperial Tobacco Group plc's ability to fill the No. 3 slot.

According to the Wall Street Journal, people familiar with the Federal Trade Commission's (FTC) review of the merger said the commission has been taking a close look at Imperial to evaluate whether the United Kingdom-based tobacco company can become a significant player in the U.S. market if the merger is approved.

The FTC is in the late stages of its review, the newspaper added.

As part of the $27.4-billion merger in which Winston-Salem, N.C.-based RAI will buy Greensboro, N.C.-based Lorillard, Imperial 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.

As the WSJ reported, the agreement gives Imperial four cigarette brands that have been losing share in a U.S. market where Imperial also has struggled. The British tobacco company spent $1.9 billion to acquire the Commonwealth brands in 2007; however, sales of Commonwealth's top-selling brand, USA Gold, fell by a third over a six-year period, according to Euromonitor, a market research firm.

Imperial in December said recent financial performance of the brands it is acquiring has declined slightly since the deal was announced, the report added.

Imperial expects regulatory approval of the deal this spring, a company spokesman told the news outlet. Reynolds, Lorillard and the FTC declined to comment.

In an industry update released Monday morning, Vivien Azer, director and senior research analyst at Cowen and Co., said during the past five months Imperial's own brand volume shares have stabilized in Nielsen-tracked channels. However, the easing volume declines are being driven by an expanding price discount relative to the category, such that on a dollar share basis, USA Gold remains under pressure. 

In addition, Azer noted there has been "consistent (albeit easing) share losses for the brands that [Imperial] is set to acquire."

"Over the last four years, we have seen Imperial's USA Gold brand lose over 30 percent of its market share. The combined market shares of Winston, Maverick, Kool and Salem have also fallen by over 30 percent over the last four years," Azer said.

On a longer-term basis, the market share softness seen for Imperial's own brands, as well as the brands currently owned by RAI and Lorillard, "is equally pronounced, reflecting a notable consolidation in industry market share over that timeframe."

Specifically, for the 10-year span between 1994 and 2014, "the three biggest brands in the market Marlboro, Newport and Camel have nearly doubled their market share (to 66.9 percent in 2014, from 37 percent in 1994)," she said. "The long-term consolidation in the category to a handful of brands, none of which [Imperial] would own post-deal, highlights the challenges that [it] will face."