BAT Says $570 Million Canada Payment to Weigh on 2019 Profit

(Bloomberg) -- British American Tobacco Plc said a legal defeat in Canada over the risks of smoking will hit its profit this year, after it set aside C$758 million ($570 million) to cover damages.

The Lucky Strike maker has held the sum in escrow following a 2015 decision by a lower court in Canada, where the company generates about 4 percent of its earnings. The Canadian units of BAT, Philip Morris International Inc. and Japan Tobacco Inc. lost an appeal Friday in lawsuits seeking C$17 billion in total damages in Quebec.

The London-based company said Tuesday it will take a charge against 2019 profit in the amount of the deposit. BAT’s Canadian unit plans to appeal to the country’s Supreme Court. The stock was up 1.6 percent after an early dip.

The Quebec Court of Appeal upheld a lower-court decision with minor changes, according to the ruling released Friday. The lawsuits were brought by smokers seeking damages for addiction and smoking-related diseases, who argued they were never warned of the risks.

The legal battle will probably continue for many years as it’ll likely be up to the Canadian Supreme Court to decide, BAT Finance Director Ben Stevens said on a results call Thursday when asked to comment on the imminent decision.

Bankruptcy Risk

If Big Tobacco loses this fight, it could bankrupt the industry in Canada, Adam Spielman, an analyst at Citigroup, has said. Friday’s decision by Quebec’s supreme court stands in contrast to the U.S., where no state supreme court ever allowed a billion-dollar damages award to stand, the analyst said.

While this case poses a risk, the industry faces even bigger headaches in Canada, where the country’s provinces are also suing the tobacco industry to recover health-care costs. Ontario alone is claiming damages of C$50 billion.

Meanwhile, the U.S. Food and Drug Administration is proposing a ban on menthol cigarettes. Products such as Newport in that market generate as much as a quarter of BAT’s profit.

The federal government may eventually need to step in to negotiate a settlement, because if legal cigarette manufacturers go under, the country would face the risk of a boom in illicit tobacco, Spielman said.

Rothmans, Benson & Hedges Inc., the Canadian unit of Philip Morris, also said it plans to appeal. Japan Tobacco said JTI-MacDonald Corp., the other defendant in the cases, is considering all options.

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