Smoking-related lawsuits against U.S. tobacco giants are leveling off, making it more likely that a merger between rivals Reynolds American Inc and Lorillard Inc will go through, analysts who follow the industry said.
The two cigarette makers, which are in talks for a multi-billion-dollar deal, face thousands of suits, but the impact has not been as dramatic as was expected a decade ago, and trials have given investors an idea of what the companies will pay. Antismoking campaigns have also made it more difficult for smokers and government enforcers to argue that companies were deceitful.
Supporting the Lorillard-Reynolds deal is "a new mood of optimism within U.S. Big Tobacco on the litigation landscape," UK-based analysts at the investment firm Jefferies Group said in a note on June 30, adding that the situation still looked risky.
Lawsuits complicate what a company is worth, increasing chances an acquiring company will overpay in a deal. Tobacco companies that have an idea what they are apt to pay smokers who have sued may be seen as better investments.
A deal between Reynolds and Lorillard, the No. 2 and No. 3 U.S. players, would reshape one of the world's biggest and most profitable tobacco markets. Lorillard makes Newport, the top U.S. menthol cigarette, and leading e-cigarette blu.
The brighter legal picture dates to 2006, when the Florida Supreme Court set aside an eye-popping $145 billion verdict against the biggest tobacco companies. The ruling in Engle v. Liggett Group left smokers to pursue cases one at a time, alleging that companies concealed the dangers of smoking.
Since 2011, Reynolds has won roughly half the 100 cases that went to trial as part of what has become known as the Engle litigation and other smoking-related cases, the company said in a securities filing in April. Lorillard said it has won about a quarter of its Engle-related trials.
No new Engle-related cases were permitted in Florida after January 2008, and few class action suits have been brought in other states.
'COMFORTABLE' WITH LIABILITY
Based on Reynolds' securities filings, Jefferies Group estimated aggregate liabilities from the Engle cases at $25 billion or less for the whole U.S. tobacco industry, and called it a "small number" relative to the industry's worth.
"If you're a U.S. tobacco investor, you're probably comfortable with this, and it's in the stock price to some extent," said Jefferies equity analyst Martin Deboo.
RBC Capital Markets said in a note in May that the U.S. tobacco industry was ripe for consolidation based in part on a "stable litigation environment."
Neither Reynolds nor Lorillard has offered a public estimate of its future liability. The companies did not respond to requests on Friday to elaborate on that and its impact on a merger.
The majority of U.S. lawsuits against tobacco companies are in Florida, where a jury in 2000 awarded smokers the $145 billion in punitive damages. The state's high court later said the smokers could not sue as a group but could use findings from the Engle class action about the dangers of smoking.
Through the first quarter of 2014, Reynolds said in a securities filing that it faced 5,000 Engle suits, down from 7,700 in December 2009. The ones that did not go to trial were settled or dismissed. Lorillard said it faced 4,000 as of this year. Some suits target multiple companies.
DECLINE OF THE DECEPTION DEFENSE
When juries find against the tobacco defendants, the awards to smokers can be substantial. Lorillard paid $79 million last year to resolve one suit from the family of a longtime smoker who died of lung cancer.
Liggett Group, a unit of Vector Group Ltd, said last year it would pay $110 million to settle 4,900 suits.
The Florida cases may represent the "last big chunk" of smoking cases, said Sergio Campos, a professor at the University of Miami School of Law.
But the mix of courtroom wins and losses has eased fears that litigation could force the companies out of business. Tobacco education has improved since litigation started decades ago, making it difficult for plaintiffs to claim they could not have known about cigarettes' addictive and disease-causing properties, he said.
"At some point, you get your hands around (the litigation), you know it won't metastasize or grow anymore, and it frees you up to explore this kind of deal," Campos said.