FTC says it has no ash to grind in RJR merger.

• Position: Tar Heel Tattler - R.J. Reynolds Tobacco Holdings planned merger - Debating red light cameras in Greensboro NC - Native American activists attempt revival of Tuscarora nation

Pulling off a big merger in the glare of antitrust scrutiny requires a tricky balancing act. Investors need assurance that the deal will help the company compete better, while regulators need to be persuaded that it won't help too much.

Winston-Salem-based R.J. Reynolds Tobacco Holdings managed that feat with surprising ease. It planned to merge with Louisville, Ky.-based Brown & Williamson to create Reynolds American Inc., based in the Twin City, at the end of July. About two weeks before the Federal Trade Commission was to rule on the deal, reports surfaced that FTC lawyers had urged the commission to challenge the merger because it would stifle competition.

At the very least, it seemed questionable by FTC standards. From fiscal 1996 to 2003, the FTC heard seven cases with similar post-merger market concentrations and changes in market concentration. It challenged six. But the commission unanimously approved the Reynolds American deal, clearing the way for consolidation of about 80% of the U.S. cigarette market in the hands of two companies. New York-based Altria Group, parent of Philip Morris, had 49% in 2003; RJR, 23%; and Brown & Williamson, 10%.

RJR CEO Andrew Schindler says the merger will cut costs $500 million a year after the companies are fully integrated--about two years after the deal is done. It is expected to improve the bottom line and cash flow in the first full year.

But the FTC decision, written by Chairman Timothy Muris, suggests that RJR is getting into bed with a loser. The commission's main argument in support of the merger is that Brown & Williamson's market share overstates its significance. In the past seven years, it has lost more than a third of what it had.

Most of Brown & Williamson's sales, Muris says, come from discount and legacy brands. Discount brands face intense price competition from smaller companies, some of which entered the market after the 1998 Master Settlement Agreement imposed higher costs on Reynolds, Brown & Williamson and other large cigarette makers. Legacy brands sell at high prices, but their users are older and their market shares shrink as customers die or switch to cheaper brands.

RJR spokesman Seth Moskowitz says he doesn't know what the company's market-share goals are. It's focused on making a profit, something it has failed to do the past two years. "Obviously, more market share is great--if it's profitable market share."

--Frank Maley

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