WASHINGTON, July 14 (Reuters) - U.S. cigarette maker Reynolds American Inc, in talks to buy rival Lorillard Inc, may have a hard time convincing regulators to approve the deal because of their big shares in the traditional cigarette and fast-growing electronic cigarette markets.
The two companies, which are No. 2 and No. 3 in the United States, are in talks to hammer out a multibillion dollar deal that would likely try to address antitrust concerns up front.
“This clearly creates a duopoly. That’s huge. That raises all kinds of eyebrows,” said Andre Barlow, an antitrust expert with the law firm Doyle, Barlow and Mazard Plc.
Still, he added: “(The deal) has a chance of being approved, depending on how big the divestiture package is.”
While Marlboro maker Altria Group dominates the shrinking U.S. market for traditional cigarettes at around 50 percent, Reynolds, which makes the Camel and Pall Mall brands, is at about 25 percent and Lorillard, whose biggest seller is the menthol-flavored Newport, is just under 15 percent.
Lorillard is the big dog in the tiny but dynamic e-cig market, with 47 percent market share thanks to its 2012 acquisition of blu eCigs and other purchases. Reynolds and Altria only recently began expanding their e-cigarette brands nationwide.
E-cigarettes are battery powered and can be used to vaporize, or “smoke” liquids that may or may not contain nicotine. A study published in March found that 10 percent of U.S. high school students had used them.
Six antitrust experts disagreed on whether regulators reviewing the deal would put e-cigarettes in the same market as tobacco and paper cigarettes when they reviewed it to determine if it was legal under antitrust law.
To make up their minds, regulators are likely to look at sales data from big retailers to determine if e-cigarette sales affect sales of traditional tobacco cigarettes, said Herbert Hovenkamp, who has written textbooks about antitrust law and teaches at the University of Iowa College of Law.
To address potential antitrust concerns, Reynolds would likely sell brands such as Kool and Salem to Britain’s Imperial Tobacco Group, which sells in 160 countries but has a tiny U.S. market share.
The companies did not return phone calls and emails seeking comment.
Reynolds and Lorillard plan to propose a plan to allay antitrust concerns at the same time they announce the deal, according to press reports.
Even with such a plan, antitrust experts said winning approval for the merger would be difficult.
Furthermore, regulators will balk at having two companies dominate an industry where historically if one company raised prices, others quickly follow suit rather than competing, said Hovenkamp. The practice is legal but troubles antitrust regulators.
Bert Foer, head of the American Antitrust Institute, urged regulators to stop the deal. “Why should we go around creating duopolies?” he asked. (Reporting by Diane Bartz; Editing by Dan Grebler)