After months of rumors and speculation, the FTC finally approved the $27 billion merger between Reynolds American and Lorillard. The deal has some breathing a sigh of relief and others worried that the merger will basically place the fate of the tobacco industry in the hands of a duopoly. Initially, merger opponents believed the deal would squeeze out U.K. based Imperial Tobacco group. However, a lucrative side deal effectively keeps Imperial in the game. The deal is supposed to close in June.
After the merger, Reynolds is expected to receive $11 billion in annual revenue, placing it behind industry leader Altria. To grease the wheels of the deal, both Lorillard and Reynolds agreed to give up a few brands to Imperial to sway fears of complete and total domination by the two companies. As a result of the deal, Reynolds will give Imperial: Winston, Cool, and Salem. From Lorillard, Imperial gets: Maverick, blu eCig, and a few manufacturing facilities in North Carolina, the chance to acquire most of the company’s existing management, sales and staff team, and guaranteed shelf space at retail stores for a designated period of time.
Still even after the merger and acquisitions of brands from Reynolds and Lorillard, Imperial will only have 10% share of the U.S. tobacco market, and most doubt that the company can make these lower performing brands really competitive in the long run. In addition, merger opponents believe the deal will lead to a price increase too. Previously, discount brands were able to compete with larger brands, but now the industry operates under master settlement agreements that requires discount brands to pay a certain amount into an escrow fund to cover any potential claims against them. This makes owning and operating discount brands expensive to maintain.
This merger is guaranteed to change the tobacco industry forever. Although Altria still retains almost half of the market, the merger between Reynolds and Lorillard will give the new entity 34% of the market.
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