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Lorillard Inc. (NYSE:LO) gained 0.4% in early morning trading on reports that the Federal Trade Commission will approve Reynolds American, Inc.’s (NYSE:RAI) bid for the company. The deal, if approved, will merge the second and third largest cigarette manufacturers in America. The deal will also merge the two most popular brands among young smokers, Camel and Newport.

Lorillard and Reynolds had earlier agreed to sell five of their brands to Imperial Tobacco Group PLC (ADR) in case the deal receives regulatory approval. According to industry analysts, Imperial will have to prove that it can become a contender for strong tobacco company if it gains assets from the other two companies. Imperial does not have a strong foothold in America but is confident that its proven overseas success will translate to America.

The Street Ratings Team has rated Reynolds as Buy with a rating of A+. Lorillard has also been rated a buy but with a rating of B-. Lorillard, according to TheStreet has important positives that negate any weaknesses. The company also has strengths in areas like revenue growth and good cash flow from operations.

The merger is anticipated to boost Reynolds’ position against Altria Group Inc (NYSE:MO), the current market leader in the American tobacco industry.

During the merger review, the FTC interviewed competitors, retailer and wholesalers about how the merger would affect their business and cigarette pricing. Some retailers showed concerns about a reduction in the competition which according to them would slim the profit margins. Others believe that the effect would be minimal.

Tobacco deals are tricky as the matter of public policy also comes up. Keeping cigarette prices low isn’t necessarily a desirable health goal as the government seeks to reduce the rate of cigarette consumption.

Reynolds and Lorillard Inc will meet this week with the FTC ahead of the final decision by the agency on the matter of merger of the two companies

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