Source: Bloomberg.com
Author: William McQuillen

Reynolds American Inc., which escaped a $145 billion class-action verdict against the tobacco industry two years ago, may see its market value cut by more than $2 billion as thousands of the same smokers press individual claims.

Several victories among the 8,000 Florida plaintiffs may reduce the second-largest tobacco company’s $15 billion value as much as 15 percent, said Brian Barish, who runs the Cambiar Aggressive Value Fund. That would equal a $2.3 billion decline.

The revival of large-scale litigation may mean the return of the discount that plagued shares of tobacco companies after a jury trial in Miami led to the historic punitive-damages award in July 2000.

“If the tobacco companies were to start to lose cases, the market would wake up to this issue,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management, who oversees $2 billion. His Bedford Hills, New York, firm owns no stock in the companies named in the suit, he said.

Reynolds fell $1.22, or 2.3 percent, to $50.99 in New York Stock Exchange composite trading, tracking the slide in Standard & Poor’s 500 shares. Reynolds has declined 23 percent this year.

Besides Reynolds, cigarette makers named in the latest round of Florida suits include Richmond, Virginia-based Altria Group Inc., the nation’s biggest tobacco company, and Greensboro, North Carolina-based Lorillard Inc., the third- largest. Lorillard fell $2.62, or 3.8 percent, to $66.99. Altria dropped 40 cents, or 1.9 percent, to $20.81.

Market `Distractions’

Altria might fall 20 percent based on the same market reaction to early smoker victories, said Cambiar’s Barish.

“Multiple small suits are still bad because it takes a lot longer to litigate each,” said Giri Cherukuri, a portfolio manager at Oakbrook Investments LLC, which oversees $1.5 billion. The litigation may lead to market “distractions” for the company, he said.

Altria, which makes Marlboro and Virginia Slims cigarettes, “has strong legal and appellate challenges to these suits,” Murray Garnick, associate general counsel of Altria’s Philip Morris USA unit, said in a statement.

Reynolds, the maker of Camel and Kool cigarettes, will defend itself in court, said spokesman David Howard in a phone interview. “No matter what number of cases are filed against Reynolds, we are prepared to manage and ultimately win these lawsuits,” Howard said. A call to Lorillard wasn’t returned.

Litigation Discount

Tobacco analysts refer to a so-called litigation discount, the amount a company’s shares are held down by uncertainty over lawsuits.

The average price-earnings ratio for U.S. tobacco companies, now about 12, fell as low as 6 before the Florida award was canceled in 2006 by Florida’s Supreme Court, said Barish, who sold some Altria stock because of low growth prospects. Reynolds’s P/E ratio is 11.2.

“Investors have tended to overreact to cases of litigation,” Barish said. “It tends to dissuade them from getting involved.”

Reynolds may be more vulnerable to multimillion-dollar losses because of its size. The company, based in Winston-Salem, North Carolina, is forecast to generate $8.8 billion in sales this year compared with Altria’s $15.5 billion, according to average estimates of analysts in Bloomberg surveys.

The smokers are getting some help from Florida’s top court in this round of cases.

Restored Findings

Five months after throwing out the $145 billion judgment and barring a class-action suit, the state Supreme Court reinstated jury findings that the companies withheld information on the dangers of smoking. Individual plaintiffs may also request punitive damages, the court said.

The plaintiffs won’t need to prove cigarettes are addictive and cause diseases including nine kinds of cancer, or that companies hid information about risks, the court said.

The high court’s actions mean plaintiffs’ lawyers need only link their clients’ illnesses to specific companies, the smokers’ attorneys said.

“It’s a big leg up” for plaintiffs, said Charles Silver, a law professor at the University of Texas in Austin. “There are a lot of smokers, and the cases are big, as a lot of them suffered pretty serious injury.”

Cigarette makers can appeal verdicts they claim are unreasonably high or unsupported by evidence.

Sympathetic Juries

Florida juries have shown sympathy to plaintiffs blaming cigarettes for catastrophic illnesses, Silver said. Among them are four whose trials grew out of the class-action case. Juries awarded an average of $12.6 million in damages per case.

In the largest verdict of the four, John Lukacs, a former three-pack-a-day smoker who lost his tongue to cancer, was awarded $37.5 million. The judge reduced that to $25.1 million. The defendants were companies that are now part of Reynolds, Altria and Miami-based Vector Group Ltd.

Smokers’ lawyers include Norwood “Woody” Wilner of Jacksonville, Florida, winner of the first such tobacco case in 1996, and Willie Gary of Stuart, Florida, who won multimillion- dollar cases against companies such as Walt Disney Co. and Anheuser-Busch Cos. Gary represents 420 smokers.

The cases of four men who died of lung cancer in the 1990s might be the next to be tried. All started smoking in their teens and consumed up to three packs a day, said Gary Paige, the attorney for their widows. A trial is set for Oct. 27 in Fort Lauderdale, Florida.

To win, plaintiffs must tie specific companies to their illnesses, and they have to show they used particular brands and saw and believed misleading cigarette advertising, Altria’s Garnick said. The companies’ defense lawyers also can try to show a cause other than smoking was responsible for a person’s sickness, he said.