Big Cig Makers Seek Adjusted MSA Payments

Published in CSP Daily News

Cite prices, market share issues

RICHMOND, Va. -- The nation's largest cigarette makers are questioning past payments they made to states as part of the $206 billion settlement over health care costs, said the Associated Press.

Philip Morris USA, R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. have said the 1998 Master Settlement Agreement (MSA) forced them to raise prices, contributing to a proliferation of low-cost competitors who took market sharea provision of the settlement. Because the major players lost market share, they want to know whether last year's payments should be [image-nocss] adjusted.

The companies' requests come as state legislation is targeting cigarette makers operating outside the agreement. Most of the settlement's 46 states have passed measures that essentially force the smaller companiesmostly discounters and regional playersto raise their prices.

Confidential documents obtained by AP show that Liggett Group Inc. and Commonwealth Brands Inc.which later joined the agreementchallenged more than $45 million of their payments due April 15. Both said in letters to the settlement's auditor that the deal allows them certain adjustments if nonparticipating manufacturers increase their market share.

Mack Caldwell, an analyst for Moody's Investors Service, cited the request by Lorillard and the other companies in a report on Virginia's sale of about $430 million in settlement-backed tobacco bonds.

More than 10 other participating manufacturers also have contested portions of their payments, according to other letters obtained from the Virginia Attorney General's office under a Freedom of Information Act request, AP said.

But the states are likely more concerned about the three biggest tobacco companies, which have more than 80% of the U.S. cigarette market and make up the bulk of the industry's payments to states. This year's payments came to $6.3 billion.

RJR and PM USA spokespersons confirmed they are requesting reviews of payments covering 2003, but the companies have not cited specific amounts they might be owed. RJR spokesperson David Howard said the Winston-Salem, N.C., company paid $2.06 billion in April 2004. We're not talking small dollars here, he said. RJR is a unit of Reynolds American Inc.

William Phelps, a spokesperson for Richmond, Va.-based PM USA, owned by Altria Group Inc., said the company does not publicly report its annual MSA payments. But considering it has about 50% of the domestic cigarette market, its annual payments could top $3 billion per year.

An official at Lorillard, part of New York City-based Loews Corp., did not return a telephone call from AP.

Caldwell said the tobacco companies would receive adjustments only if the settlement contributed to their market-share losses. Another requirement: It must be shown that the individual states did not diligently enforce a provision that forces nonparticipating manufacturers to pay money into escrow accounts.

Although the market share of nonparticipating manufacturers grew to 8.1% in 2003 from less than 1% before the settlement, the states' legislative actions are now apparently taking their toll. In a speech Wednesday, as reported in CSP Daily News, an executive of PM USA parent Altria Group Inc. said that deep discounterswhich include many companies operating outside the accordhave seen their market share decline slightly.