Federal antitrust enforcers yesterday cleared the proposed $3 billion merger of two of the nation's three largest tobacco companies.
The Federal Trade Commission voted 4 to 0 to close its investigation of R.J. Reynolds Tobacco Holdings Inc.'s proposed acquisition of Brown & Williamson Tobacco Corp., the U.S. unit of British American Tobacco PLC. Reynolds is the nation's second-largest cigarette firm; Brown & Williamson, the third-largest.
By closing the investigation, the agency signaled that it would not challenge the merger, which would create a new firm, called Reynolds American Inc., that would control about 30 percent of the U.S. cigarette market. The market leader, Philip Morris USA Inc., sells about half of all cigarettes in the United States, including Marlboro, which accounts for 40 percent of all U.S. cigarette sales.
Some of the agency's staff members argued that the merger, which would give the two top firms 80 percent of the market, would raise the price of branded cigarettes and reduce the availability of increasingly popular discount brands.
The commissioners said they did not believe it would reduce competition, noting that Brown & Williamson "plays an increasingly minor role in the U.S. cigarette market." The commission also said the two firms' brands do not compete with each other.
"We have concluded that this transaction is unlikely to harm consumers," wrote the FTC's chairman, Timothy J. Muris, and commissioners Orson Swindle and Thomas B. Leary. Commissioner Mozelle W. Thompson concurred, while Commissioner Pamela Jones Harbour recused herself.
Reynolds makes Camel, Winston, Salem and Doral; Brown & Williamson makes Kool, Pall Mall, Lucky Strike and Misty.
In announcing the merger in October, Reynolds and Brown & Williamson said the new company would be stronger and better able to compete against both Philip Morris and the discount brands. With their packs selling for at least $1 less than the well-known labels, the discounters' share of the market has grown from 1 percent in 1997 to 10 percent today, according to Martin Feldman, a tobacco analyst at Merrill Lynch & Co.
By contrast, both Reynolds and Brown & Williamson have seen sharp drops in their market share. Brown & Williamson's share went from 15 percent in 1994 to 10 percent today. Reynolds's share dropped from about 25 percent five years ago to 22 percent today, Feldman said.
As health concerns about smoking have mounted, the industry has seen a sharp drop in sales, with shipments falling from 620 billion cigarettes in 1982 to 371.4 billion last year. That decline, coupled with the $246 billion settlement that cigarette companies agreed to in 1998 to compensate states for smoking-related illnesses, has affected all major manufacturers.
Opposing the merger was the American Antitrust Institute, a nonprofit competition advocacy group, which issued a paper in March saying the merger would "increase concentration beyond acceptable levels in an already highly concentrated industry." That, in turn, would boost the chances of price coordination among the few remaining manufacturers and make it harder for discounters to obtain retail shelf space.
The group cited one benefit to the merger: Higher cigarette prices could "choke off cigarette consumption and reduce the social burden of dealing with smoking-related illness."
The institute's president, Albert A. Foer, called the FTC decision surprising. "It sounds as if the commission is really beginning to move away from a presumption about concentration as being an important indication of anti-competitive potential," he said.
Reynolds said last night it expects the acquisition to be completed by the end of July, pending approval from its shareholders.