RJR PROVIDES POSITIVE
NEWS FOR TOBACCO BONDS
Holders of tobacco settlement bonds were rewarded with good news
on two fronts this week by R.J. Reynolds - one business related
and one legal.
Business wise, tobacco bondholders may benefit from the stability
that is likely to occur following the recently announced merger
between the tobacco units of R.J. Reynolds and British American
Tobacco's (BAT) Brown & Williamson (B&W).
Under a definitive agreement reached by both tobacco makers early
this week, a new company, Reynolds American, Inc., will comprise
the domestic cigarette businesses of both RJR and Brown & Williamson.
By combining the second and third largest tobacco producers, Reynolds
American will have an estimated 32% market share, trailing only
Altria's Philip Morris USA unit, which controls almost 50% of the
domestic tobacco market.
BAT will own 42% of Reynolds American, with the remaining 58% owned
by current RJR shareholders. The merger, expected to close in mid-2004,
will result in a company generating annual revenues of $10 billion
and a domestic cigarette volume of 136 billion units.
Under the merger agreement, B&W will transfer to RJR all of
its Master Settlement Agreement liabilities and approximately $750
million to cover previously accrued payment obligations. As outlined
in the MSA, this transfer will be automatic and should have no effect
on payments to bondholders.
Positive effect on MSA
Other aspects of the merger should have positive effects on the
ability of the surviving entity, Reynolds American, to meet its
MSA payment obligations. Although both RJR and B&W have struggled
in recent years, their combination is expected to bring $500 million
in operational savings each year and allow the new company to better
rationalize its product lineup in the face of continuing competition
from low-cost brands.
Assuming the merged entity is able to achieve its goals, Reynolds
American should emerge as a strong and more profitable competitor
in the domestic tobacco industry. In this case, Reynolds American
will be a more stable producer in an increasingly fractious market.
On the legal front, RJR benefited from an emergency stay, granted
on October 24 by a justice on the Illinois Supreme Court, in the
Turner "lights" case. This class-action suit against RJR was brought
in Madison County, Ill., the same venue as the earlier Price case
against Philip Morris USA.
Since the Supreme Court has decided to hear the Price case this
fall, skipping the intermediate appellate court, it is notable that
Illinois' highest court has decided to consider whether the similar
Turner case should be stayed pending its ruling in Price.
Through both actions, the Supreme Court may be indicating that it
is tired of seeing lower courts in Illinois (and Madison County
in particular) being used for unnecessary class-action suits. Forthcoming
rulings on both Price and Turner will indicate if this reading is
correct. In any case, the court has moved to remove both cases from
the public spectacle in which they had become engulfed.
Ultimately, we believe that the court will most likely rule in favor
of PM USA and RJR, and we continue to follow both cases closely.
10/30/03
About Dr. Abrams
|
