Reynolds American wins U.S. antitrust approval to buy rival Lorillard

(Adds Reynolds comment, dissents from two commissioners)

WASHINGTON, May 26 (Reuters) - Reynolds American Inc (NYSE: RAI - news) on Tuesday won U.S. antitrust approval to buy smaller rival Lorillard (NYSE: LO - news) in a deal that would combine the No. 2 and No. 3 U.S. cigarette companies.

The Federal Trade Commission said it would allow the acquisition to go forward on condition that the companies sell four cigarette brands - Winston, Kool, Salem and Maverick. They will be purchased by Imperial Tobacco Group PLC.

Reynolds, which makes Camel and Pall Mall cigarettes, said in July 2014 it would buy Lorillard, which makes Newport (NasdaqGS: NEWP - news) , for $27.4 billion. At that time, it offered to sell the four brands to address any antitrust concern, as well as Lorillard's Blu e-cig. Blu was not mentioned in the final agreement with the FTC, but its sale is expected to go forward.

Altria Group (NYSE: MO - news) , which owns Marlboro, has a 47 percent U.S. market share, followed by Reynolds at 26 percent and Lorillard at 14 percent, according to 2013 data from Euromonitor International. The data is the most recent available.

The vote to approve the deal was 3-2 with Democrat Julie Brill and Republican Joshua Wright dissenting. Chairwoman Edith Ramirez, Republican Maureen Ohlhausen and Democrat Terrell McSweeny voted to approve the settlement.

In her dissent, Brill argued that the deal meant that the remaining cigarette companies would be able to raise prices and that Imperial was too small and weak to provide real competition.

"It is no surprise that Reynolds would ... refuse to provide a meaningful divestiture package that would replace the competition lost through its merger with Lorillard," she wrote.

Wright argued the opposite, saying that the investigation should be closed with no required divestitures since the assets sales were already promised.

The deal presented antitrust enforcers with a dilemma: Their mandate is to prevent higher prices because of mergers, but U.S. public policy aims to make cigarettes more expensive to discourage smoking.

The FTC has reviewed two other major cigarette mergers in the past 20 years.

In 2004, it allowed R.J. Reynolds to buy rival Brown & Williamson without divestitures. An expert familiar with the FTC at the time said at least some commissioners opposed using agency resources to litigate to keep cigarettes cheap.

In 1994, the commission sued to stop British American Tobacco's $1 billion purchase of American Tobacco. The two sides eventually settled, and the merger went forward. (Reporting by Diane Bartz; Editing by Eric Beech and Steve Orlofsky)