PM USA Wins the Day

Illinois ruling clears way for Kraft spinoff; U.S. Supreme Court appeal still an option

SPRINGFIELD, Ill. -- Tobacco stock analysts anticipated Altria Group Inc.'s stock prices would rally following the Illinois Supreme Court's decision to remand the Price Lights case, which could have cost the Philip Morris USA parent company more than $10 billion. And in fact, stock prices did rise from about $74 per share to $78 shortly after the decision was announced. By days end the stock price had settled near $76.50.

More important to cigarette retailers, however, is the notion that the decision will likely stand as a precedent in other lights lawsuits [image-nocss] across the country, saving cigarette manufacturers billions of dollars and keeping tobacco prices from increasing, said analyst Bonnie Herzog of Citigroup Research, New York.

The court ruled that state law is preempted by the Federal Labeling Act. This is the best-case scenario for [Altria] and the industry, Herzog wrote in a research note. The decision will have far more reaching implications than just the cases filed in Illinois. Herzog notes there are more than 40 lights cases pending in 25 states.

The Illinois court said the maker of Marlboros and other brands did not defraud customers in its marketing of "light" cigarettes. In doing so, it reversed the verdict and sent the case back to Madison County court with instruction to dismiss the matter.

The divided state Supreme Court ruled that the Federal Trade Commission specifically allowed companies to characterize their cigarettes as "light" and "low tar," so PM USA did not improperly mislead customers about the health impacts of its cigarettes, according to the Associated Press.

Herzog said this was the most positive outcome in one of the most highly anticipated rulings in the tobacco industry this year. We expect [Altria's] stock to rally around 10% on this news over the next few days.

Marc Greenberg, a tobacco analyst with Deutsche Bank, New York, agreed. This is a clear-cut victory for tobacco and clears a major hurdle to spinning [off] Kraft Foods Inc. [from Altria], he said. The breakup of Altria is also expected to include the spinning off of PM USA in the future.

Both analysts, however, said the ruling did leave the option open to appeal the case to the U.S. Supreme Court. The plaintiffs have 90 days to request an appeal, and if granted, it would be at least a year before a decision was rendered, according to Herzog.

The case originated in a Madison County, Ill., state court in 2003. The lawsuit sought repayment for every pack of cigarettes every smoker bought since Philip Morris began selling light cigarettes in 1971, according to a report in the Chicago Tribune. The size of the damages, a record for any verdict in Illinois, is about double the annual operating income for PM USA.