Copyright 1999 The New York Times Company
The New York Times
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March 14, 1999, Sunday, Late Edition - Final
Correction Appended
SECTION: Section 3; Page 8; Column 5; Money and Business/Financial Desk
LENGTH: 812 words
BYLINE: By KENNETH N. GILPIN
HEADLINE: MARKET INSIGHT;
Why Smoke (Still) Gets In Their Eyes
PURSUED by lawyers and politicians, tobacco companies have found it difficult
the last few years to be proactive on behalf of what most likely is a nervous
base of shareholders.
So it came as something of a surprise last week when RJR Nabisco announced that
it would separate its tobacco and food businesses, a variation on a step that
some shareholders have advocated strenuously.
By peeling off tobacco from the rest of the company, management's thinking went,
liability for smoking-related lawsuits could be concentrated in the stand-alone
R. J. Reynolds Tobacco Company, shielding the food business. But Wall Street
evidently doesn't believe that the lawyers and politicians will leave the food
company alone: RJR Nabisco's stock has barely budged since the plan was announced.
Calvert D. Crary, a lawyer and securities analyst at the Westport, Conn., firm
of Crary, Onthank & O'Neil, looks for investment opportunities created by
lawsuits. He surveyed the legal and financial landscape confronting RJR Nabisco
and the industry.
Q. Investors don't seem to appreciate the moves that RJR Nabisco proposed last
week. What is your view?
A. To me, the strategy looks pretty darn good. Both companies will be out there
to take claims of tobacco plaintiffs. But the only way plaintiffs could go after
the assets of Nabisco Group Holdings, the food company's holding company, is
if the assets of RJR Tobacco are exhausted. And the holding company represents
some interesting opportunities for shielding liability.
The holding company's sole asset is an 80.6 percent stake in Nabisco Holdings,
the food company. So its assets are limited. Conceivably, Nabisco Group Holdings
could go bankrupt and still have a nonbankrupt subsidiary, Nabisco Holdings.
In addition, for all practical purposes a tobacco case is an ongoing tort. Separating
the tobacco company from the food company insulates the food company from torts
committed after the date of the split. That makes it more complicated for the
plaintiff.
Q. Has the freestanding tobacco company's position been improved by this move?
A. Well, the company got nearly $8 billion for their foreign tobacco business,
which is a great price. They will be able to use that money to pay down a lot
of their debt, which means that Reynolds Tobacco will be able to generate a
tremendous amount of cash over time. That might make the company attractive
to a buyer, like British American Tobacco, that would assume their liability
risk.
Q. Are there any new legal developments that might limit the size and scope
of lawsuits against the new tobacco company?
A. Reynolds Tobacco could try something called a limited fund, non-opt-out class
action settlement. Liggett & Myers is using it, and it has been upheld at
the trial court level with a number of other companies. The idea is if a company
feels it has too many claims pending against it and can't pay all of them, it
will agree to settle at a set amount. The Supreme Court has a case before it
which will decide whether these actions are appropriate, and if so, under what
circumstances. If many of these cases, including Liggett's, are resolved favorably,
then Reynolds would probably adopt a similar strategy.
Q. Is civil litigation the greatest threat to RJR Nabisco and the tobacco industry?
A. I think regulation is a much bigger risk.
Until recently, it appeared likely that the Justice Department might bring a
broad criminal case against the tobacco companies. If news reports are accurate,
the chances of that happening have diminished. But a civil lawsuit is still
a real possibility.
Beyond that, the Supreme Court is scheduled to hear arguments this fall about
whether to reverse the Fourth U.S. District Court of Appeals and give the Food
and Drug Administration jurisdiction to regulate cigarettes. I think the Supreme
Court will reverse that decision.
If the Republicans lose control of one or both houses of Congress in next year's
elections, it will be very bad news for the tobacco companies. On the other
hand, if the Republicans win the White House and sustain their Congressional
majorities, tobacco company stocks will fly before the returns are even in.
Q. Do the political and legal risks make tobacco stocks unattractive?
A. Personally, I think RJR Nabisco is a great buy here, particularly if it is
seen as a takeover candidate. I think the stock will trade at a speculative
premium.
Over the next few years, Reynolds Tobacco will make money. So will Philip Morris.
But tobacco will be much more controlled and, in my view, will be phased out
over a generation. But money can be made in that environment, particularly if
"safe cigarettes" can be developed. Both Philip Morris and Reynolds
are going to get very active in that area once they get litigation problems
behind them.
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CORRECTION-DATE: March 21, 1999, Sunday
CORRECTION:
Because of a transcription error, the Market Insight column last Sunday about
the legal and financial outlook for the tobacco industry rendered the designation
of a court incorrectly in a comment from Calvert D. Crary, a lawyer and securities
analyst, about its ruling last year that the Food and Drug Administration had
no authority to regulate tobacco. It is the United States Court of Appeals for
the Fourth Circuit, not the Fourth U.S. District Court of Appeals.
GRAPHIC: Photo: Calvert D. Crary
LOAD-DATE: March 14, 1999