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The Federal Trade Commission voted unanimously late Tuesday to clear R.J. Reynolds Tobacco Holdings Inc.’s $2.5 billion acquisition of Brown & Williamson Tobacco Corp., freeing the companies to close the deal. The 4 to 0 vote represents a stunning turnaround for a deal that most investors had considered dead as recently as two weeks ago amid reports that the FTC staff considered the merger anti-competitive. “Based on an intensive investigation … we do not believe that the transaction is likely substantially to lessen competition in the U.S. market for cigarettes.” FTC Chairman Timothy J. Muris wrote in a statement from himself and Commissioners Orson Swindle and Thomas Leary. Reynolds issued a statement Tuesday evening saying they expect to close the deal by the end of July. “We are pleased with the FTC decision, which allows our proposed business combination to proceed as planned,” Reynolds chairman Andrew J. Schindler said. “The creation of Reynolds American Inc. and the combination of RJRT and B&W will enable us to achieve tremendous efficiencies, and will greatly enhance the combined companies’ ability to compete effectively in the U.S. marketplace.” The three FTC commissioners, all of whom hold Republican seats, said they concluded that Brown & Williamson plays an increasingly minor role in the U.S. cigarette market. They also said there are not any brands for which the two are each other’s closest competitors, which is an essential element for challenging a deal under the so-called unilateral effects theory. They also said there is no evidence that the merger would lead to coordination of pricing among the surviving cigarette companies, which means there is no basis to challenge the deal under the so-called coordinated interaction theory of competitive harm. “Accordingly,” they wrote, “we have concluded that this transaction is unlikely to harm consumers.” FTC Commissioner Mozelle Thompson, who holds one of two Democratic seats, issued a concurring statement in which he expressed some worries that the merger could lead to price coordination. But he said those concerns did not warrant challenging the merger. Commissioner Pamela Harbour did not participate in the case. Her former law firm had previously represented Reynolds in other matters. A Reynolds spokeswoman was not immediately available for comment. Staff lawyers at the FTC had opposed the merger for months, arguing that it would result in higher price for branded cigarettes and reduce the availability of generic brands. The merger would give Reynolds and Philip Morris USA Inc. control of more than 80 percent of the market. The company announced in October plans to buy the U.S. unit of British American Tobacco plc. In a separate statement on Tuesday, Reynolds said the Internal Revenue Service has ruled that the merger will be tax-free to both Reynolds shareholders and to British American Tobacco, the parent of Brown & Williamson. Copyright �2004 TDD, LLC. All rights reserved.

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