Philip Morris affiliate announces $23.5B CCAA plan to resolve Canada litigation

Philip Morris (PM) has been informed by its deconsolidated Canadian affiliate, Rothmans, Benson & Hedges, or RBH, that the court-appointed mediator and monitor in RBH’s Companies’ Creditors Arrangement Act, or CCAA, proceeding filed a proposed plan of compromise and arrangement outlining certain terms of a resolution of tobacco product-related claims and litigation in Canada against RBH and its affiliates. The court-appointed mediator and monitors also filed substantially similar proposed plans for Imperial Tobacco Canada and Imperial Tobacco Company and JTI-Macdonald Corp. Under the proposed plan, if ultimately approved and implemented, RBH, ITL and JTIM would pay an aggregate settlement amount of $23.5B. This amount would be funded by an upfront payment equal to the companies’ cash and cash equivalents on hand in Canada plus certain court deposits of $540M for working capital inclusive of cash pledged as collateral and annual payments based on a percentage of the companies’ net income after taxes until the aggregate settlement amount is paid. As stated in the proposed plan, the issue of allocation of the C$32.5B aggregate settlement as between the companies in the CCAA proceedings remains unresolved. The proposed plan, broadly speaking, would release claims against RBH and its affiliates, including PMI and its indemnitees, relating to the manufacture, marketing, sale, or use of or exposure to, RBH’s combustible and traditional smokeless tobacco products based on conduct prior to the effective date of the proposed plan; related litigation would also be dismissed – bringing an end to all pending tobacco product litigation in Canada, including class actions brought in different provinces and, beginning in 2001, health care cost recovery actions brought by each of the Provinces. If the proposed plan is approved and implemented, RBH, ITL, and JTIM would pay an aggregate amount of $23.5B into trusts for the benefit of claimants, comprising two primary components: upfront contribution equal to the companies’ cash and cash equivalents on hand plus certain court deposits, with a withholding of $540M for working capital inclusive of cash pledged as collateral; the proposed plan projects that the total industry upfront contribution would be C$12.5B as at December 31, after the C$750M withheld working capital amount is deducted. annual contributions determined by reference to a percentage of the companies’ Canadian affiliates’ only “net after-tax income” until the aggregate amount is paid in full. Annual contributions start at 85% of NATI, with a five-percentage point reduction in NATI every five years until reaching 70%. Annual contributions are contingent on positive NATI of the companies. Such payments and obligations concern only the Canadian affiliates and not the ultimate parent company PMI. As stated in the proposed plan, the issue of allocation of the C$32.5B aggregate settlement as between the companies in the CCAA proceedings remains unresolved. Alternative product businesses would be transferred to an RBH affiliate and not factored into the calculation of the annual contribution payments described above. The proposed plan, including the terms described above, remains subject to any further negotiation by the parties and CCAA court orders, voting by claimants, and approval by the CCAA court. According to a schedule proposed by the court-appointed mediator and monitors, voting on the proposed plan would occur in December. If accepted by claimants, a hearing to consider approval of the proposed plan would then be expected in the first half of 2025. The carrying value of PMI’s equity interest in RBH is in line with the fair value determined at the date of deconsolidation, $3.28B, subject only to ongoing adjustments for the effect of foreign currency exchange rates. If the proposed plan is approved and implemented, the fair value of PMI’s continuing investment in RBH will be dependent on its final terms, and any allocation of responsibility for funding the aggregate settlement amount among the companies. These or similar or related developments may have a material adverse impact on the fair value of PMI’s continuing investment in RBH and may result in non-cash impairment charges, which could be material to PMI.