Rothmans Deal Presents Challenges for Philip Morris

Source from:  August 01, 2008, by Jonathan Ratner Market Call, Takeovers 08/05/2008

Philip Morris International Inc.'s friendly $2-billion takeover of Canadian cigarette maker Rothmans Inc. may not be material in financial terms given the U.S. tobacco giant's more than US$100-billion market capitalization, but it does increase its litigation exposure. This factor, along with the extreme difficulty Philip Morris will have in bringing its brands to bear in Canada - it cannot use the Marlboro name, for example, since British American Tobacco plc owns the brand - has Citigroup's Adam Spielman telling clients that he doesn't like the deal. He even had photos of du Maurier packs with a impotentcy-warning limp cigarette and stroke-worthy lung to demonstrate some of the challenges Canada presents. While Philip Morris says its comfortable with the additional litigation risk it is taking on, "pessimists could argue that the British Columbia and copycat cases are actually more threatening than anything in the U.S.," the analyst said. "Arguably the whole point of the spin-off that created Philip Morris was to get away from litigation risk," he added. Mr. Spielman said Canadian litigation is different from the rest of the world and provided in-depth analysis of the legal situation in British Columbia. He also highlighted differences between the U.S. and Canadian markets, including the fact that 20% of consumption comes from non-name brands illegally smuggled from First Nation's Reservations (more than 30% of consumption in Ontario and Quebec), the fact that Canadians smoke Virginia blend cigarettes and avoid American blend, "extremely tough" anti-tobacco regulation, and a consistent industry downtrend since 2003. And while Philip Morris probably would have preferred buying a cigarette company in an emerging market, this shows how few attractive targets are out there, the analyst said, noting that the deal will nonetheless be accretive. Enditem