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BAT discloses $555 million in MSA dispute charges involving Reynolds, ITG

BAT discloses $555 million in MSA dispute charges involving Reynolds, ITG

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British American Tobacco Plc said Wednesday that it took a $554.8 million charge during fiscal 2020 related to an annual Master Settlement Agreement-type payments dispute.

In June 2015, BAT subsidiary R.J. Reynolds Tobacco Co. sold traditional cigarette brands Kool, Maverick, Salem and Winston for $7.1 billion to U.K.-based Imperial Brands Plc. The brands were transferred to Imperial's U.S. subsidiary ITG Brands LLC of Greensboro.

The four brands combined represent about 7.5% of the U.S. market share for traditional cigarettes.

Reynolds divested Kool, Salem and Winston, while Lorillard Inc. divested Maverick, in order for Reynolds to gain federal regulatory approval of its $29.25 billion purchase of Lorillard.

Imperial has made the fee payments in the 46 MSA states since acquiring the brands.

However, federal judges have ruled Reynolds retains the MSA payment responsibilities in Florida, Minnesota and Texas despite divesting the brands. Imperial reached an MSA fee payment agreement with Mississippi.

In August, a three-judge District Court appeals court in Florida affirmed Reynolds is obligated to make annual payments of about $84 million on the brands. In December, the Florida Supreme Court declined jurisdiction to address the dispute.

BAT said Wednesday it continues to "pursue indemnification remedies in a Delaware court." There is a parallel MSA legal dispute involving the companies in Delaware.

BAT said the $555 million charge is related to "settlement discussions with other manufacturers and Texas, Minnesota and Mississippi."

Background

Tobacco manufacturers, including Reynolds and Philip Morris USA, agreed in 1998 to settle lawsuits that 46 state attorneys general, including North Carolina, brought over smoking-related health-care costs.

They agreed to pay those states at least a combined $246 billion over 20 years. MSA payments to some states are in perpetuity.

The MSA fees fluctuate annually because they are based on each participating manufacturer’s traditional cigarette sales volume.

According to the Kaiser Family Foundation, participating manufacturers have paid $160.07 billion since 1998, including $3.05 billion to North Carolina.

Florida, Minnesota, Mississippi and Texas chose to negotiate separate settlements with the manufacturers.

Both manufacturers have chosen not to make the disputed MSA payments to the three states since June 2015.

Reynolds has said its position remains that Imperial purchased the brands and that ITG should be making the payments.

The estimated fiscal 2020 payment for the four brands is $40 million to Texas, $32 million to Florida and $10 million to Minnesota. Florida said when it filed its lawsuit that its overall disputed amount was $92.6 million.

However, industry analyst Michael Lavery with Piper Sandler said in December that Reynolds’ combined MSA financial obligations to three states could be worth $409 million: $207 million to Texas, $135 million to Florida and $47 million to Minnesota.

“Ongoing costs could weight on future (British American Tobacco) earnings,” Lavery said. “We expect further appeals to continue into 2021.”

Responsibilities

The Reynolds-Imperial deal included language that called on ITG to use its “reasonable best efforts” to reach an MSA settlement with Florida.

Imperial has countered it did not agree to assume the payments, and that it was relieved of payment responsibility since it couldn’t reach an agreement with then-Florida attorney general Pam Bondi before the closing of the simultaneous purchases.

According to the Florida appellate court ruling, the judges said the Reynolds-Lorillard asset purchase agreement “did not in any way vitiate the responsibilities and obligations of Reynolds under the Florida settlement agreement to the state of Florida.”

“We find the Florida settlement agreement to be a clear and unambiguous contract, which required any amendment to the contract to be in writing and agreed to by all the parties to the contract.

“We find, simply put, that a contract is a contract, and that Reynolds continues to be liable under the contract it signed with the state of Florida.”

“The trial court also correctly found that ITG did not assume liability for payments to Florida under the APA, and that ITG was not a successor or assign under the FSA,” according to the appellate court ruling.

Bondi estimated the annual payment for the four brands is about $30 million.

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@rcraverWSJ

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