The deal, which Reynolds and Lorillard value at about $27 billion including debt, is expected to close in the first half of 2015 but faces further scrutiny over how the combination would affect competition in a highly competitive market and cigarette prices, which have grown about 5 percent annually in the last 10 years.
Once complete, the new company, which will remain based in Winston-Salem, North Carolina, is projected to have more than $11 billion in revenue and claim an about 34 percent share of the U.S. retail cigarette market. It also would a powerhouse in menthol cigarettes, which are becoming a bigger part of the business and gives the combined company some breathing room even as people smoke fewer cigarettes every year. The company, however, will sell off Lorillard's dominant Blu e-cig brand to focus on Reynolds' rechargeable Vuse e-cigarette brand, which expanded nationally in June.
While the companies did not say what specific information regulators have requested as part of the review called a second request, federal merger guidelines place importance on future competition.
Analysts have focused specifically on the share of adult smokers under 30 years old as a predictor of future market share positions and trends. Currently the industry distribution of that market is split between three companies but would shift to two companies having about 45 percent share of adult smokers under 30.
Other issues include enhanced market power, particularly in the menthol category, in which Newport and Camel are two of the largest players. On its own, Newport accounts for 37 percent of the menthol segment.
CLSA analyst Michael Lavery places the likelihood of the deal being approved as-is at 30 percent. Others believe there's a 40 percent chance it's blocked altogether and other brands may need to be sold to pass muster.
"The process is inherently unpredictable (and possibly political), but we believe the guidelines point to real hurdles to approval," he wrote in an investor note.
While regulators have declined to comment on the content of or timeline for the review, an analysis of average investigation length in the Antitrust Law Journal, indicates the review could take around 170 days.