The U.S. government may try to block R.J. Reynolds Tobacco Holdings Inc.'s proposed $3-billion acquisition of Brown & Williamson Tobacco Corp. after antitrust enforcers concluded that the combination would stifle competition, people familiar with the matter said.
Federal Trade Commission lawyers have recommended that the agency challenge the plan by R.J. Reynolds, the second-largest U.S. tobacco company, to acquire the No. 3 company, the people said. The FTC staff is concerned that the merged company and No. 1 Philip Morris USA would control more than 80% of U.S. cigarette sales, the sources said.
R.J. Reynolds, the maker of Camel and Winston cigarettes, is counting on the takeover to bolster profit after a 30% decline in sales and a loss of almost 3 percentage points in its U.S. cigarette market share since 1999. Brown & Williamson, owned by British American Tobacco, would lose its opportunity to shed billions of dollars in potential liability in smoker suits if the combination is blocked.
"It would really be devastating for RJR, a setback for everything they have put in motion in the past year," said Coy Monk, who helps manage $115 million at Charlotte, N.C.-based Myers. The fund this year sold the 50,000 shares of R.J. Reynolds it owned after they rose 50%.
R.J. Reynolds spokesman Seth Moskowitz declined to comment. Mark Smith, spokesman for Brown & Williamson, maker of Lucky Strike and Kool Brands, referred questions about the merger to R.J. Reynolds. FTC spokesman Mitch Katz declined to comment.
Shares of R.J. Reynolds, which have risen more than 30% since the transaction was announced in October, fell 21 cents to $56.84 on the New York Stock Exchange. Eight million of 80 million R.J. Reynolds shares outstanding have been sold short, a way of betting the price will drop.
Wholesalers and retail chains have complained to the FTC that combining R.J. Reynolds and Brown & Williamson would increase the tobacco firms' ability to dictate marketing and discount terms, people said.
The new company, which would be called Reynolds American Inc., would have 31% of the market. R.J. Reynolds shareholders would own 58% and British American Tobacco would hold the rest.
The five-member FTC would have to vote to authorize a lawsuit seeking a court injunction. Susan Creighton, director of the FTC's Bureau of Competition, hasn't decided whether to concur with the staff recommendation, the sources said.
The FTC seldom overrules staff recommendations, said Robert Doyle, a Washington antitrust lawyer.