Tobacco firms snuff deal
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April 8, 1998: 4:03 p.m. ET
Cigarette companies pull out of Congressional tobacco settlement talks
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NEW YORK (CNNfn) - Shares of tobacco companies rose after word surfaced that the five major tobacco companies are withdrawing their support for federal legislation to raise the cigarette tax and curtail teenage smoking.
The drastic move was led by RJR Nabisco, which said Wednesday it will pull out of Congressional negotiations in Washington, calling last year's $368.5 billion settlement "dead."
Soon after word of Reynolds' action, the other tobacco firms also said they would withdraw from the deal. Those companies include Philip Morris Cos., Lorillard Tobacco Co., a division of Loews Corp., Brown and Williamson Tobacco Corp., part of B.A.T Industries Plc, and U.S. Tobacco, which makes smokeless tobacco.
Investors applauded the tobacco companies' stance. In Wednesday afternoon trading, shares of RJR Nabisco (RN) rose 1-1/16 to 30 while Philip Morris (MO) gained 1-11/16 to 39-1/4. U.S. Tobacco (UST) was up 1-1/4 to 30-1/8 and Brooke Group (BGL) edged up 3/16 to 15-3/4.
Tobacco stocks had fallen earlier in the week, edging near their 52-week lows. Roy Burry, tobacco analyst at CIBC Oppenheimer, said if any investors were thinking about buying tobacco stocks, "Now is the time."
"The stocks have performed very poorly over the last six to nine months and now we have the realization that if nothing comes out of Congress, it's back to litigation. That's fine. The industry was doing just fine with that."
A feisty Steven Goldstone, CEO of RJR Nabisco Holdings Co., said all sides involved in the negotiations had lost an opportunity to get things done.
"The extraordinary settlement reached on June 20 last year that could have set the nation on a dramatically new and constructive direction regarding tobacco is dead," Goldstone said before the National Press Club Wednesday.
RJR Nabisco is the parent company of R.J. Reynolds Tobacco Co. and was one of the participants in negotiations with Congress over a national settlement to the tobacco companies' litigation.
The change in attitude was precipitated by the introduction of a bill sponsored by Senate Commerce Committee Chairman John McCain (R-Ariz.). That bill, which was approved by the committee, would have raised the amount tobacco companies would have to pay to $516 billion over 25 years.
In addition, the bill gives the industry less civil liability protection than the June 20 settlement, but still requires advertising and marketing concessions. The House has not started formal work on its version and no date for action has been set.
Tobacco companies were angered by the hike in the settlement price. Goldstone said Congress felt tobacco companies were weakening and rushed in to up the ante to collect more money even though it would not further the aims of reducing teen smoking. (317K WAV) or (AIFF)
The tobacco companies have insisted that the additional costs proposed by the McCain bill would impair them financially to the point that they might be forced into bankruptcy.
McCain, speaking in New York Wednesday, said that he asked the U.S. Treasury Department to study the tobacco industry's burden and the agency said the companies could live with these figures.
U.S. President Bill Clinton, during a tour of a Chicago school, said he hoped R.J. Reynolds would reconsider, but said it is critical for Congress to act on the issue, regardless of the company's position.
"I've been working for two years on this and I don't intend to stop now," said Clinton. (128K WAV) or (AIFF)
Goldstone is unlikely to heed the calls of the president. In his speech, the tobacco executive chided Clinton for his lack of leadership in the negotiations.
Connecticut Attorney General Richard Blumenthal, one of the officials who hammered out the original settlement last June, said the tobacco firms were taking the wrong approach.
"If anything, these kinds of threats and posturing will only antagonize and embolden Congress," said Blumenthal. "With or without the industry participating, this process will move forward."
Despite strong words from Goldstone that the legislative effort was "broken beyond repair," some analysts speculated that the pullout was merely a negotiating ploy to rein in the rush toward a greater settlement.
"I think what will happen is that there will be another period of negotiations over the next few weeks," said Martin Feldman, tobacco analyst at Salomon Smith Barney.
McCain was adamant that the announcement by the cigarette makers would not affect things going forward. "We will not be deterred by some threats from the tobacco companies."
The senator said he believed that the cigarette makers did not have the support of the American public and also stated he had other weapons to attack tobacco, including regulation through the U.S. Food and Drug Administration and also higher taxation.
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