Tuesday, Altria (MO) made its full annual Master Settlement Agreement (MSA) payment of approximately $4 billion. It includes approximately $156 million that PM (Phillip Morris) USA disputes it owes as a result of the 2005 Non-Participating Manufacturer (NPM) Adjustment. There is more here than just this money though.
Some Background:
Just like the 2003 and 2004 NPM Adjustments, Altria paid the disputed money to the states, although according to the Master Settlement Agreement it could have placed disputed money into a “Disputed Payments Account”.
“We continue to work in good faith with the states to resolve the Non-Participating Manufacturer adjustment dispute, whether by settlement or by the arbitration process specified by the Master Settlement Agreement,” said Denise Keane, general counsel of Altria.
For the years 2003, 2004 and 2005, the The Brattle Group, appointed under the Master Settlement Agreement has rendered a final and non-appealable decision that the MSA was a “significant factor contributing to” the market share loss of the Participating Manufacturers for 2003, 2004 and 2005. The loss in market share was to smaller discount cigarette makers that are not bound by the term of the settlement.
Because of their decision, the Original Participating Manufacturers are entitled to a Non-Participating Manufacturer Adjustment to their 2003, 2004 and 2005 payments. States that prove they have diligently enforced their qualifying escrow statutes during all of 2003, 2004 and 2005 will be able to avoid application of the Adjustment to their payments.
The refund due to Altria should they prevail would now be approximately $500 million.
Altria and the other Original Participating Manufacturers claim the dispute over the NPM Adjustment is subject to binding arbitration pursuant to the Master Settlement Agreement’s arbitration clause. States and territories claim that this dispute should be determined by state courts. However, more than 45 courts have agreed with Altria’s position that arbitration is the required forum for this dispute. Right, that is 45-0 in favor of the tobacco companies.
What Else Is There?
RJR Tobacco (RAI), also made its payment of $2.25 billion, but deposited the disputed amount of $431 million into the “disputed payments account”. It is the third year the maker of Camel, Kool and other brands deposited the disputed portion of its payment into the “disputed” account.
Remember that little FDA bill we talked about last week?
Altria is firmly behind the bill and RJR has been against it from day one. Altria is using the payments, and their cooperation in not witholding funds from cash-starved states as leverage to get the bill passed in a form it wants. In the same respect, RJR is witholding cash from the same states in an attempt to force changes to the bill it wants.
Little has been said about the bill, probably because most in the media have not bothered to read it yet but if it passes in its current form. Altria is the winner.
The bill will essentially eliminate new cigarette introduction in the US. With over 50% market share, Altria will have its market protected by the FDA. RJR, on the other hand, will not be able to introduce new products in an attempt to steal share from Altria. They will be forced to purchase new brands, a far more expensive proposition.
If the disputed funds go to arbitration, the tobacco companies will win and this is the reason the states want it in their courts. That being said, both Altria and RJR are using the money to influence legislation. Should the trade off for Altria be they forgo the money to get the legislation they want, it will be money well spent.
Disclosure (“none” means no position):Long MO, None
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