The long-awaited $27.4 billion merger between Reynolds American Inc. RAI and Lorillard Inc. LO finally received clearance from the Federal Trade Commission (FTC) after a prolonged review regarding anti-competitive issues.
The merger between the second and third largest U.S. cigarette makers was first announced in Jul 2014. Reynolds — the maker of Camel brand cigarettes — hired Lazard Ltd. (LAZ), an investment bank, to look for a possible deal to buy Lorillard. Post merger, Reynolds’ largest shareholder British American Tobacco (BTI) will continue to own 42% of the company.
In an attempt to ease anti-trust issues, Reynolds and Lorillard divested several of their key brands like blu eCigs, Winston, Kool, Maverick and Salem to the U.K.-based tobacco maker, Imperial Tobacco. After the divestment, Imperial Tobacco owned almost a 24% share in the U.S. tobacco market.
After scrutinizing the deal for nearly a year, the FTC finally seems to be satisfied with Reynolds’ divestitures. Per the FTC, the divestitures have positioned Imperial Tobacco as a significant competitor in the tobacco industry.
The closure of the deal is subject to clearance from the federal district court. Both R.J Reynolds, an indirect subsidiary of Reynolds, and Lorillard are subject to a civil judgment passed in 1999 in a government racketeering case. Per the ruling, both the companies have to obtain clearance from the court before divesting any cigarette brand.
The acquisition is expected to consolidate the tobacco industry and increase growth opportunities for Reynolds. The merger will also bring Lorillard’s Newport and Reynolds’ Camel brands under the same banner.
Moreover, Lorillard, with a Zacks Rank #2 (Buy), enjoys a solid presence in the profitable e-cigarette market on the back of its blu eCigs and SKYCIG brands. These will help Reynolds gain share in this category. The merger is also expected to pose tough competition to other tobacco majors like Altria Group Inc. MO and Philip Morris International Inc. PM.
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