Tobacco Ruling Seen as a Win for Shareholders
Saturday, August 19, 2006
Tobacco stocks rallied yesterday after investors concluded a U.S. district judge's ruling against eight cigarette companies would cost them little and would clear the way for a corporate restructuring likely to benefit many shareholders.
The ruling by Judge Gladys Kessler, released Thursday after the U.S. stock markets closed, also removed a cloud of uncertainty over how much the Justice Department's seven-year-old racketeering lawsuit might hurt the industry, analysts said.
"From a business perspective, this is a complete win," said David Adelman, an analyst with Morgan Stanley. "They're not making any substantial payments. There's no threat of future substantial payments."
Kessler agreed with the government's argument that the cigarette makers had violated civil racketeering laws by conspiring for decades to mislead the public about the dangers of smoking. And she ordered the companies to alter some of their marketing practices and undertake a massive media campaign to correct years of deceptive advertising.
Those requirements, if upheld on appeal, would cost millions of dollars, analysts said. But they would be "an imperceptible cost of doing business" for an industry that reaped tens of billions of dollars in profit just last year, Adelman said.
Among the biggest financial beneficiaries, analysts said, will be shareholders of Altria Group Inc., parent of Philip Morris USA Inc. and maker of Marlboro cigarettes. As well as being the largest global cigarette company, Altria owns 88.1 percent of Kraft Foods Inc., the second-largest global food and beverage company, known for brands including Nabisco, Maxwell House and Jell-O.
The judge's ruling is likely to spur Altria to move ahead with plans to spin off Kraft as a separate company, which would boost shareholder value, analysts said. Company executives had said the suit, with its potential for large damages, posed a possible obstacle to the breakup.
Altria's stock rose nearly 4 percent yesterday, to close at $83.97 a share. Analysts estimate that after a split, Altria and Kraft shares would be worth $90 to $100 combined.
Altria reported profit of $10.44 billion on sales of $97.85 billion last year. Tobacco accounted for 65 percent of global sales, and food accounted for nearly all the rest.
Altria also might split Philip Morris USA and Philip Morris International into two companies, analysts said. Its foreign tobacco sales were more than double its U.S. cigarette sales.
Kessler ordered the companies to stop labeling cigarettes as "light," "low tar," "mild," or other "deceptive brand descriptors which implicitly or explicitly convey to the smoker and potential smoker that they are less hazardous to health than full-flavor cigarettes."
That part of the ruling would take effect Jan. 1, if not stayed pending an appeal, said Justice Department spokesman Charles Miller. He could not say whether that part would apply to the companies' business practices overseas. Jonathan Turley, a law professor at George Washington University, said he thought the order was unlikely to affect the companies' overseas marketing.
Altria said it would appeal Kessler's ruling. Reynolds American Inc., maker of Camel, Winston, Salem and Kool cigarettes, was considering an appeal, a spokesman said. British American Tobacco PLC plans to appeal, a spokesman said.
The Justice Department brought the case in 1999, originally seeking sanctions of $280 billion from the companies, which executives said could have bankrupted the industry. But an appeals court threw out the claim for those sanctions.
Kessler also said she had no power to grant the government's request that the industry be forced to spend $14 billion to help smokers quit and to educate people about the dangers of smoking.