A new report by RBC Capital Markets attempts to shed some light on the unclear situation surrounding the potential merger of Reynolds American, Inc. RAI 2.06% and Lorillard Inc. LO 3.12%. After recent headlines that the Federal Trade Commission (FTC) could possibly sue to block the deal, the market has been left hanging until any definitive word comes from the FTC.
In the report, RBC analysts break down exactly what is happening and lay out possible paths forward from this point.
The Latest On The Situation
RBC believes that a meeting took place between representatives from either Reynolds, Lorillard, or both and at least two FTC officials on the afternoon of March 31.
According to an article in the New York Post following the suspected meeting, the FTC staff is, in fact, recommending a lawsuit to block the potential $27 billion merger between the second- and third-largest cigarette makers.
The Scenarios
RBC analysts see three possible scenarios:
1. The five FTC commissioners can overrule the staff’s decision and approve the proposed merger as-is, a scenario which seems unlikely.
2. The commissioners can overrule the staff regarding the lawsuit, but still demand concessions from the two companies before the merger is approved.
3. The FTC will proceed with a lawsuit to block the merger.
Outlook
As of Tuesday morning, RBC analysts believed that an FTC lawsuit to block the merger was unlikely, however the story has continued to develop throughout the day. Now that FTC staff has recommended carrying through with the lawsuit, it appears as if that scenario is now much more likely.
If the lawsuit proceeds, RBC analysts believe that Reynolds and Lorillard will win the court battle and the merger will ultimately be approved.
RBC lists Reynolds stock as a Top Pick.
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