FTC Rejects B.A.T. Proposal To Divest Cigarette Brands to Lorillard

The Federal Trade Commission has rejected B.A.T Industries' application to divest six discount cigarette brands to Lorillard Tobacco Company, citing concerns that Lorillard would not compete aggressively in the discount cigarette market and that the divestiture in all likelihood would cause the cigarette plant in Reidsville, North Carolina, to close. Under a Commission Order that requires divestiture, B.A.T now must find a new buyer for the assets, and obtain FTC approval of the transaction before going ahead.

B.A.T, the parent company of Brown & Williamson Tobacco Corporation, is required to divest the discount cigarette brands, as well as the Reidsville plant and three full-revenue brands of cigarettes unless B.A.T persuades the Commission to allow it to divest only the discount brands, under a 1995 FTC consent order. Brown & Williamson acquired the brands and the plant in its acquisition of American Tobacco Company. The FTC challenged that acquisition, charging that it violated federal antitrust laws by substantially reducing competition in the U.S. cigarette industry, potentially giving B.A.T and other firms remaining in the market greater ability to collude. The FTC letter rejecting the divestiture application states that the acquisition eliminated the "competitive fringe" in the market, thereby creating a "three-firm oligopoly, with incentives to engage in tacit collusion, and reduced the number of fringe firms that might counter the effects of such coordination by aggressive price competition."

The FTC negotiated the 1995 consent order to resolve these allegations, and the divestiture requirement included in that settlement is intended to restore the competition lost in the merger. The settlement would allow B.A.T to divest only the discount brands if it persuades the Commission that this divestiture would satisfy the goals of the order.

In November, B.A.T applied for FTC approval to divest only the six discount brands -- Montclair, Riviera, Malibu, Bull Durham, Crows, and Special Tens -- to Lorillard. The FTC sought public comment on the application. Many commentators expressed concerns that divesting to Lorillard would not improve competition in the tobacco industry, and that the acquisition would leave many people without employment in Reidsville.

According to the FTC letter rejecting the application, although B.A.T demonstrated that Lorillard would be a viable competitor, it did not show that Lorillard would restore the necessary degree of competition into the market. The Commission "anticipated that divestiture . . . would restore an independent, new force to the market: one capable of vigorous price competition" and one "that would place the excess capacity attributable to the Reidsville plant in the hands of a firm with incentives to compete aggressively." According to the FTC letter, "Lorillard devotes significant resources to its menthol, full-revenue brand, thereby leading to perceptions that it is a one-brand firm," and it "has not demonstrated that it has been involved in the promotional activity necessary to maintain and grow a discount brand."

The Commission added that the divestiture would result in Lorillard having a product mix similar to that of the other major players, giving it similar incentives and making Lorillard less likely to be an aggressive price promoter.

In addition, because Lorillard does not want the Reidsville plant, the divestiture would "eliminate the possibility of removing from B.A.T's control the excess capacity that the plant represents and placing it in the hands of an aggressive competitor that could use the capacity to increase production," the Commission said.

Finally, the Commission said, the divestiture to Lorillard would reduce concentration in the market by only a small portion of the maximum possible reduction.

The Commission vote to reject the application was 4-1, with Commissioner Mary L. Azcuenaga dissenting.

Copies of the Commission's letter and other documents associated with this case are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web site at: http://www.ftc.gov

(FTC Docket No. D09271)