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U.S. suit likely to keep tobacco stocks down; Losses might be recovered from cigarette price rise


WITH THE JUSTICE Department preparing a federal lawsuit to recover the costs of treating smoking-related illnesses paid by federal programs, the tobacco industry faces the possibility of paying billions more in damages -- in addition to the $246 billion it has agreed to pay over 25 years to settle claims by all 50 states. The lawsuit, which President Clinton announced in his State of the Union address Tuesday, also could force further restrictions on advertising and federal regulation of nicotine. What kind of threat does federal litigation pose to the tobacco industry? How are tobacco companies likely to react? Can the industry sustain another huge settlement and remain in business?

Doug Cogan

Director, Investor Responsibility Research Center Tobacco Information Service

Before Tuesday night, the thought was that three-quarters of the industry's risks were behind it as a result of the settlement with the states. But now the federal government has made a decision to pursue its own case and a whole new threat has arisen.

One of the important near-term implications is that it probably means a further delay in the spinoff of the Nabisco food unit of RJR Nabisco.

If the past is any indication, the industry will certainly fight this. Yet at some point there is a possibility that they will settle. I wouldn't be surprised to see the industry try to resurrect parts of the June 20, 1997, settlement deal, which failed.

The industry might say, 'Look, we're willing to settle, but let's find some room to compromise.' Companies might look again at finding some blanket immunity from future claims. One idea being bandied about is that the money used in the settlement might be used almost as an insurance policy to pay future individual and class claims.

As far as the stocks, I think this means they are still dead in the water. The feeling is the dark cloud of litigation has not been lifted. Just when it looked like the skies were going to clear, this new cloud comes rumbling over the horizon.

I wouldn't rule out the possibility that there might be rumblings about bankruptcy for some of the companies. I think what's more likely is that the companies will just continue to hobble along. Tobacco prices have been well below the point where smokers simply can't pay for it. There are still a lot of opportunities for smokers to absorb price increases.

John Banzhaf

George Washington University law professor and executive director of Action on Smoking and Health

I think the tobacco companies are going to settle it. They're not going to fight it. In the state cases, they said they were going to vigorously defend against the suits. But eventually they copped out. Within a couple of days, they are going to be knocking on Attorney General Janet Reno's door and saying, 'Hey, let's see if you can come up with a settlement before you file the suit.'

This suit is stronger than many of the state suits for a number of reasons. Unlike with virtually all of the state suits, here there is a federal statute. Secondly, the federal government has far more smoking-gun documents than were available when some of the state suits were settled.

A settlement would drive up the cost of a pack of cigarettes considerably. Still, in other countries, people pay far more than we do and the industry is still able to sell cigarettes. In many countries, 60 percent of the price is the taxes. Here, it's about 30 percent. The price in Denmark is $4.75. In Ireland, it's $4.94.

The industry is tremendously resilient. But coupled with other strong anti-smoking measures, a federal lawsuit could decrease the ability of the industry to lure and addict teen-agers.

Two of our goals are to reduce smoking, particularly among kids, and to make people who sell it and use it bear the enormous costs of the habit. Those two things are likely to occur as a result of the federal lawsuit.

Jack Maxwell

Analyst, Davenport & Co.

You would have to take it seriously. Some people say the federal government has no basis but I wouldn't think the government would proceed if it didn't. Obviously, the industry is going to fight it out in the courts.

Tobacco stocks are down. And I presume they're going to stay down. The market doesn't like this. I have major tobacco stocks rated at underperform. It's pretty hard when you have all these things hanging over you.

The price of a pack of cigarettes has gone up to about $2.70 from $1.90 18 months ago. And they're talking about a 55-cent excise tax. With impeachment, I don't think they will get around to that for a while. But with that you're getting up to the $3 range.

Companies are going to continue to raise prices because of the prior settlement. With every 10 percent price increase, you have a 4 percent reduction in consumption, they say. So there's been a reduction of about 15 percent this year and this is going to jam it up more.

Consumption elsewhere in the world is not increasing. Total world consumption is flat. I don't know what they can do today that they haven't been doing for decades to make up for the loss of U.S. consumption.

Pub Date: 1/24/99

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