By Brent Kendall And Tripp Mickle
Antitrust enforcers are asking detailed questions about business
plans and leadership of a third company scheduled to play a key
role in Reynolds American Inc.'s proposed $25 billion acquisition
of rival Lorillard Inc., underscoring the agency's wariness after a
rocky experience with a rental-car merger.
Reynolds and Lorillard have sought to head off government
antitrust concerns by selling $7.1 billion in cigarette brands and
other assets to Imperial Tobacco Group PLC, a U.K.-based global
tobacco company that operates in more than 20 markets, including
Germany, Australia, Cambodia, and Turkey. The idea behind the
divestiture, disclosed in tandem with the merger in July, was to
give Imperial a significant U.S. presence that could replace market
competition previously provided by Lorillard.
People familiar with the Federal Trade Commission's review of
the merger said the commission has been taking a close look at
Imperial to evaluate whether the firm 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.
Imperial would be taking over four cigarette brands--Winston,
Salem, Kool and Maverick--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 company Commonwealth
Brands in 2007 only to have sales of Commonwealth's top-selling
brand, USA Gold, fall 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 FTC's questions have continued since Imperial said on Feb.
26 that it was parting ways with tobacco executive Martin Orlowsky,
whom it had tapped to be executive chairman of its expanded U.S.
operations, according to people familiar with the review.
An Imperial spokesman said the departure of Mr. Orlowsky, a
former Lorillard chief executive with two decades of experience in
the tobacco industry, "was a clash of working styles. There was
always complete agreement on the working plans" for the U.S.
business, he said.
Imperial expects regulatory approval of the deal this spring,
the spokesman said.
Imperial has named David Taylor, Lorillard's chief financial
officer, to lead its new U.S. subsidiary if and when the
Reynolds-Lorillard merger receives government clearance. Mr. Taylor
joined Lorillard in 2008 after serving as interim finance chief at
Eddie Bauer Holdings Inc.
Reynolds, Lorillard and the FTC declined to comment.
Antitrust lawyers say the FTC is more carefully evaluating
proposed divestitures in light of a 2012 settlement in a rental-car
merger that went sour.
In that case, the FTC allowed Hertz Global Holdings to acquire
rival Dollar Thrifty under an agreement that required Hertz to sell
off its Advantage Rent A Car brand. Advantage was supposed to
emerge as a strong independent competitor, but it suffered early
setbacks and sought bankruptcy protection months after the
government settlement was completed.
A Canadian private-equity firm bought much of the Advantage
assets in a bankruptcy auction and the company remains in
operation, but Hertz was able to buy back 10 Advantage locations.
The episode was considered an unfortunate lesson for the FTC,
showing divestitures in antitrust cases can easily stumble.
"Once bitten, twice shy definitely applies," said Jonathan
Kanter, an antitrust lawyer with Cadwalader, Wickersham & Taft
LLP who isn't involved in the tobacco deal. "The FTC is always
going to do its due diligence to make sure a buyer is viable. But
the agency tends to be more careful when the memory of getting
burned is fresh," he said.
A similar phenomenon happened during the mid-1990s when the FTC
was stung by a settlement involving divested supermarkets in St.
Louis, Mr. Kanter said. "The response from the agency was to clamp
down on proposals in future deals."
The Reynolds-Lorillard deal would combine the No. 2 and No. 3
U.S. cigarette companies. The merged companies would remain No. 2,
behind Altria Group Inc. FTC staffers investigating the merger are
expected to make a recommendation soon on whether the commission
should allow it, seek additional concessions or challenge the
deal.
A decision from the FTC's five commissioners could come within
weeks, people familiar with the matter said.
Staff recommendations haven't always been persuasive on tobacco
deals. The commission in 2004 granted antitrust clearance to
Reynolds purchase of rival Brown & Williamson, despite
objections from FTC staff.
Tobacco deals also can be tricky as a matter of public policy,
because keeping cigarette prices down isn't necessarily a desirable
public-health goal with other parts of the government working to
reduce smoking rates. The FTC's review, however, isn't supposed to
consider policy issues that aren't related to competition.
Write to Brent Kendall at brent.kendall@wsj.com and Tripp Mickle
at Tripp.Mickle@wsj.com
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