Report Says Deal Could Net Tobacco Execs $200 Million

Top tobacco executives personally stand to gain more than $200 million in stock option profits if Wall Street remains enthusiastic about the giant tobacco truce as most analysts predict, a new report issued Wednesday said.

The biggest winner would be Geoffrey C. Bible, Philip Morris chairman and chief executive, whose stock options could grow in value by $72.9 million, according to the report issued by the Institute for Policy Studies, a liberal think tank based in Washington.

Two other Philip Morris executives would see the value of their options rise more than $20 million apiece, while RJR Nabisco Chairman Steven F. Goldstone and UST Chairman Vincent A. Gierer Jr. could profit by $8.4 million and $6.7 million, respectively, the report said. Stock options allow executives to buy shares in their companies at below-market prices and profit from the higher current price of the

stock.

The report did not take a stand on the $368.5-billion tobacco accord, which, if ratified by Congress, will restrict future legal claims against the industry in exchange for big settlement payments and an array of public health concessions.

But Sarah Anderson, a fellow at the institute, said the results should “raise some warning flags.”

The executives head “an industry that has caused a lot of deaths and health problems,” she said, and the settlement should be “about improving public health and not about lining the pockets of these executives.”

However, tobacco representatives said raising the stock price of their companies is what executives are paid to do.

“Any time a stock moves up, all of the company’s shareholders benefit . . . and that obviously includes management shareholders,” said Jason Wright, spokesman for RJR Nabisco Holdings, owner of R.J. Reynolds Tobacco. “To try to single out any class of shareholders is just plain silly.”

Another industry spokesman, who declined to be identified by name, said the analysis is based on various assumptions that may or may not come true. This is “speculation about a future that can’t be known,” he said.

Wall Street has reacted favorably to the tobacco truce, bidding up tobacco stocks about 15% between April 1, when peace talks began, and June 20, when the deal was announced.

Although cigarette price increases required to fund the deal are likely to cut sales and profits, the manufacturers would benefit from greater predictability and reduced legal vulnerability. Therefore, the companies and most financial analysts are expecting share prices to climb briskly in the next 12 months if Congress approves the deal.

Using proxy statements filed with the Securities and Exchange Commission, the report estimates that rising share prices would create a jackpot of $206 million for 15 executives who between them hold nearly 12.4 million stock options--five each from Philip Morris, RJR, and UST, the top manufacturer of smokeless tobacco.

Executives from three other cigarette firms were not included: Brown & Williamson because its British parent, BAT Industries, does not file executive compensation data with the SEC; Lorillard Inc., because it does not reward its executives with stock options; and industry small fry Liggett Group Inc., which reached a separate legal settlement.

Co-authored by the Stakeholder Alliance, another Washington-based group, the report estimated the stock option gains by comparing April 1 share prices with the prices it said are likely to be reached if Congress blesses the tobacco accord.

Those target prices--$60 per share for Philip Morris, $44 for RJR and $40 for UST--came from estimates by Gary Black, a prominent tobacco analyst for Sanford C. Bernstein & Co. In trading Wednesday, Philip Morris shares rose 81 cents to close at $45.94, RJR rose $1 to close at $34, and UST was unchanged at $29. All trade on the New York Stock Exchange. Black’s estimates for Philip Morris and RJR are fairly consistent with those of other analysts, although he is more bullish than others about UST. For example, Martin Feldman of Smith Barney believes UST’s share price will remain flat or drift lower during the next 12 months even with the settlement.

According to the report, Philip Morris’ Bible holds 3.45 million stock options that rose in value by nearly $29.8 million from the start of negotiations April 1 to the June announcement of the deal. The report says their value would surge an additional $43 million-plus to $72.9 million after Congress approves the settlement.

The report says the deal would also provide bonanzas of $21.9 million to Murray H. Bring, a Philip Morris executive vice president, and $21.2 million to James M. Kilts, a former Philip Morris vice president who recently left the company.

At RJR, chairman Goldstone would not be the biggest winner. According to the report, that distinction would belong to retired Chairman Charles M. Harper, whose 1.36 million options would be worth an extra $16.1 million.