Philip Morris, the largest company involved in the Master Settlement Agreement (MSA), made its full 2006 payment of $3.4 billion last week. With a 50% market share of all domestic cigarette shipments, Philip Morris pays half of the payments due to states under the agreement. Other tobacco makers, including R. J. Reynolds and Lorillard, have so far made partial payments, or are awaiting the April 17, 2006, deadline.
Philip Morris’ move means the MSA will continue to receive its payments this year without interruption – a significant fact for investors holding tobacco settlement bonds. Many “turbo” or accelerated payments are likely to be paid as well.
The willingness of Philip Morris to make its full payment comes on the heels of an arbitrator’s recent ruling that the MSA, itself, caused the companies who were originally part of the agreement to lose market share. As a result of the arbitrator’s report, manufacturers had sought to reduce their payments this year by 18%.
A provision in the MSA, known as the Non-Participating Manufacturer’s Adjustment, allows tobacco companies to withhold part of their annual payment if it can be proved that the agreement itself caused a loss of market share. The companies must also prove that the states failed to diligently enforce the MSA. The arbitrator ruled on the market share loss provision, but state enforcement efforts have yet to be determined. A final determination will not come soon as enforcement will have to be examined on a state-by-state basis.
Big news for investors
The payment by Philip Morris is a positive development because it signals intent to observe the agreement and cooperate with the states attorneys general to resolve disputes. With the largest tobacco manufacturer now having made its payment, pressure is increased on other companies who are part of the MSA to follow suit. The states have already publicly declared their intent to reach accommodation with the tobacco manufacturers on this matter.
Assuming the other manufacturers follow Philip Morris’ lead, both sides will have shown a willingness to reach an agreement on a potentially financially damaging issue that is key to the long-term strength of the MSA. While the current dispute is not fully resolved, and all manufacturers have yet to make their annual payment, we remain encouraged that a final resolution satisfactory to both sides is in the offing.
