Reynolds American's (RAI) will have a tough time getting antitrust regulators to approve its $25 billion acquisition of rival Lorillard (LO) since it will result in two cigarette companies controlling about 90 percent of the U.S. market and could result in consumers paying higher prices, according to an antitrust law expert.
The deal, announced Tuesday between the second and third-largest U.S. tobacco companies, would result in a post-merger Reynolds and rival Altria , home of Marlboro cigarettes, controlling 90 percent of the U.S. cigarette market. British American Tobacco (BTI) would see its share more than triple to 10 percent after it acquires brands such as Kool, Winston and Blue cigarettes, the best selling brand in this growing category.
"Their attorneys must know something that I don't know if they think they are going to get it past the enforcement agencies," said Joseph Bauer, a professor of law at the University of Notre Dame Law School, in an interview. "It's hard not to imagine them challenging this particular transaction."
"It will certainly get a very thorough review," said Michael Jacobs, Distinguished Research Professor of Law at DePaul University College of Law, in an interview. "I think it will be a tough sell to the regulators."
Given the complexity of the deal, the companies don't expect it to close until the first quarter of next year. Reynolds spokesman David Howard told MoneyWatch that consumers will benefit from the transaction because it enables British American Tobacco to emerge as a "strong number three."
Wall Street, though, is skeptical about the deal. Shares of Reynolds, which is based in Winston-Salem, NC., fell nearly 7 percent Tuesday, closing at $58.84. Greensboro, N.C.-based Lorillard slumped more than 11 percent to $59.82 and British-American Tobacco fell 1.8 percent to $120.65.
Combined, Reynolds and Lorillard would be a formidable competitors. Combined, the two companies would have 34.1 percent of the U.S. cigarette market, with an estimated combined sales of $11.4 billion and operating income of between $4 billion and $4.8 billion. They would generate about $800 million in savings from the merger.
The companies hope that their array of brands such Newport will help it gain an edge over rival Altria, whose Marlboro brand controls a staggering 44 percent of the U.S. market, Newport is the best selling menthol cigarette, a brand which according to Bloomberg News is popular in urban areas. Data from the federal Substance Abuse and Mental Health Services Administration shows that the number of smokers using menthol-flavored cigarettes is on the rise, which is problematic given that they post a more significant health risk than conventional smokes.
"Reynolds American and Lorillard have complementary core strengths and the addition of Newport to our operating companies' existing key brand portfolios -- including flagship brands Camel, Pall Mall, Natural American Spirit and Grizzly -- will enhance our ability to compete in the combustible cigarette and smokeless categories," said Susan Cameron, Reynolds CEO, who will retain her position after the merger closes, in a press release.
The Reynolds American-Lorillard deal is one of many big challenges awaiting regulators at the Federal Trade Commission and the U.S. Department of Justice. Sprint, the wireless company controlled by Japan's Softbank, reportedly is encountering some resistance from authorities over its plans to buy smaller rival T-Mobile USA. DISH Network (DISH), a satellite television provider, recently raised "competitive concerns" about the proposed sale of its rival DirecTV (DTV), though it hasn't formally opposed the deal. The company, though, has urged the FCC to reject Comcast's (CMCSA) plans to acquire Time Warner Cable (TWC).