Bloomberg News

States Discuss Proposal to End Tobacco Company Payment Fight

June 22, 2011

(Updates with Missouri official’s statement in third paragraph.)

June 22 (Bloomberg) -- State attorneys general are considering a proposal to end a fight with tobacco companies over $7.1 billion in payments their states claim under a 1998 settlement.

The accord with 46 states required the companies to pay $206 billion to resolve any liability in health-care cost lawsuits. The fight over $7.1 billion in payments under the 13-year-old accord stemmed partly from company claims that market share erosion limited their liability. State officials are to discuss the dispute at a meeting today in Chicago.

“There is a proposed agreement,” Nanci Gonder, a spokeswoman for Missouri Attorney General Chris Koster, said today in an e-mail. Gonder declined to provide any details.

Resolving disputed and withheld payments for 2003 through 2010 may boost profit and spur share repurchases by Altria Group Inc. and Reynolds American Inc., according to Christopher Growe, an analyst at Stifel Nicholas & Co. in St. Louis. A settlement may take the form of a credit against future payments, he said.

Altria, which has maintained control of about 50 percent of U.S. cigarette sales since 2003, may recoup about $2 billion it has disputed or withheld in annual payments, Growe said in a note today to clients.

For second-biggest Reynolds, which has lost market share, the refund may approach $3.5 billion, he said. He rates both stocks as “hold.”

Bonds Rise

Bonds backed by payments from tobacco companies to settle the suits rose after the Wall Street Journal said cigarette makers may get $2 billion in an agreement with states.

California tobacco bonds maturing in June 2045 yielded an average of about 6.2 percent today, down from 6.5 percent June 20. Ohio tobacco bonds maturing in June 2024 yielded an average of about 7.8 percent, down from 8.1 percent.

J.B. Van Hollen, Wisconsin’s attorney general, declined to discuss the status of the negotiations, which he said are continuing. Some of the attorneys general gathered at Chicago’s Drake Hotel will meet later today to confer about the dispute, he said.

The 1998 Master Settlement Agreement between the states and cigarette makers called on states to pass laws requiring non- signing manufacturers to make payments into 25-year escrow funds comparable to the payments they would have had to make if they’d signed the deal.

Legal Protections

The provisions protect the four original settling manufacturers, which include Altria’s Philip Morris USA, Reynolds American’s R.J. Reynolds Tobacco, Lorillard Inc.’s Lorillard Tobacco, and smaller companies that signed the agreement later. They were intended to prevent non-settling companies from charging lower prices and cutting into the market share of companies that settled.

The companies claim they are entitled to pay reduced amounts for 2003 to 2010 because the states haven’t been sufficiently diligent in collecting the escrow payments from their smaller competitors.

Altria declined to comment, said David Sutton, a spokesman for the Richmond, Virginia-based company, as did Jane Seccombe, a spokeswoman for Reynolds and Robert Bannon, a Lorillard spokesman.

--With assistance from Sarah Frier in New York. Editors: David E. Rovella, Charles Carter

To contact the reporter on this story: Andrew Harris in Chicago at aharris16@bloomberg.net; Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net; Bob Van Voris in New York at rvanvoris@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net. Robin Ajello at rajello@bloomberg.net.


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