RJR and Philip Morris Prepare for Bankruptcy

Author: Joseph Cherner

April 28, 2003

Exit strategy includes selling assets and distributing proceeds to shareholders

RJR and Philip Morris know that they can't go on killing 400,000 Americans annually forever. The only remaining question is how much longer can they get away with it. In preparation for eventual bankruptcy, both companies have started getting rid of assets and distributing proceeds to shareholders.

RJR has done a particularly "brilliant" job of getting rid of assets. In recent years, it has sold all of its international business and all of its Nabisco food business.  It distributed the cash to its shareholders very quickly through huge dividends and stock buybacks. RJR is now a very small company. Its "market cap" (the value of its outstanding stock) is now less than $2.5 billion. It has executed its "exit strategy" meticulously. When it finally goes bankrupt, there will be very few assets left for claim holders. It's kind of like the strategy of people who want to die broke. RJR will die almost broke. Financially speaking, RJR has done a superb job!

Philip Morris has chosen a slightly longer path. It probably believes that tobacco companies can get away with killing 400,000 Americans annually for a little longer than RJR believes. Philip Morris recently sold its Miller Brewing business, but kept a sizable stake in the new company. Philip Morris also recently spun off its Kraft food business but again kept a sizable stake in the new company.

In the near future, you can expect Philip Morris to get rid of its stake in Miller and its stake in Kraft. Over the next few years, you can expect Philip Morris to sell its international operations. Like RJR, Philip Morris distributes cash from these proceeds through hefty dividends and share buybacks. Last year alone, Philip Morris distributed almost $12 billion to its shareholders through dividends and share buybacks.

RJR and Philip Morris have lost several multi-billion lawsuits to addicted or dead smokers. These verdicts are currently on appeal. When these verdicts are finally upheld by higher courts, RJR and Philip Morris will have very few assets left to pay the victims.

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This op-ed represents the views of Joseph Cherner, a former Wall Street executive who was also the expert financial witness in Florida's Engle class action lawsuit which resulted in a $146 billion verdict against the tobacco cartel. The judgment is currently on appeal.