FIRMS HOPING DEAL BRINGS PEACE.

Byline: Noam Neusner Bloomberg News

Will there be life after the cigarette wars?

Tobacco companies sure hope so. For decades, they've been deemed the rogues of American commerce, marketing disease and death in cellophane-wrapped packs. That perception, warranted or not, begat public scorn, media attacks, hundreds of lawsuits and ultimately the ire of the government.

Cigarette makers expect the hundreds of billions of dollars they've pledged in the settlement - plus acceptance of federal oversight and dozens of other concessions big and small - to bring legal peace and allow them to finally spin off assets, borrow money at good rates and win better market valuations.

``Once this is done, tobacco will be accepted as an industry just like any other industry,'' said David Adelman, an analyst at Morgan Stanley.

That's the reward. But the risk to Philip Morris Cos., RJR Nabisco Holdings Corp., Loews Corp. and B.A.T. Industries Plc. is enormous.

The industry, which sells $50 billion of tobacco products in the U.S. a year, will finance much of its costs - $368.5 billion over 25 years - by boosting prices. That could reduce U.S. domestic sales by as much as 14 percent immediately.

The companies will also fund ad campaigns telling people not to use its products, potentially accelerating the decline in U.S. sales to 3 percent a year or more, from 1 percent, analysts say. They'll also fund a campaign aimed at reducing smoking by teen-agers, who are increasingly picking up the habit.

Tobacco companies hope the trade-off will be worth it.

They'll be able to trim some costs, especially the $6 billion spent each year on marketing and promotions, and $600 million that goes to lawyers.

Plus, the companies and their investors won't have to fear the damage a lawsuit can do to share prices. One judgment last year shaved Philip Morris' market value by $12 billion in a day.

Of all the tobacco companies, Philip Morris has the most to gain from the settlement, analysts said. It holds about 50 percent of the U.S. cigarette market, and more than half of all young-adult smokers buy its lucrative, high-priced Marlboro cigarettes.

New York-based Philip Morris could hold its commanding lead as a ban on most forms of marketing would prevent rivals from snagging customers by using snazzier advertising.

``Philip Morris cleans up,'' said Gary Black, an analyst at Sanford C. Bernstein & Co.

Plus, smokers put off by higher prices will trade down to lower-price brands - especially Basic, a Philip Morris product and the third best-selling discount brand, he said.

The company also is the world's largest cigarette company; its international sales, at about $24 billion in 1996, were double U.S. sales of $12.5 billion.

And if the company needs to raise cash to pay for the settlement, it can do so readily. Its corporate debt is rated A by Standard & Poor's Corp.

Philip Morris may even be able to split the U.S. cigarette business from its Kraft Foods unit, international tobacco division and Miller Brewing Co., analysts said. Chairman Geoffrey Bible, though, said in April that the company had no intention of shedding its food or beer businesses.

RJR, the second-largest U.S. cigarette maker, doesn't have the luxury of an overpowering international business or large cash balances to cushion a drop in cigarette consumption.

Its U.S. cigarette business pulled in $4.55 billion last year, while international tobacco had $3.62 billion in sales.

Still, the maker of Camel and Winston cigarettes has much to gain from the settlement.

It intends to spin off its 80.5 percent stake in Nabisco Holdings Corp., which makes Ritz and Oreo snacks, something shareholders have wanted since the company sold the initial 19.5 percent stake in January 1995.

The New York-based company has said it wouldn't spin off Nabisco before the end of 1998 if it would deplete cash flow enough to push its bonds below investment grade. Standard & Poor's rates RJR's senior debt at BBB-, one notch above junk.

The key will be to make sure RJR's payments to cover the initial settlement costs won't doom the bonds to junk status, which could delay a Nabisco spinoff for a year, analysts said.

Black of Sanford Bernstein said RJR could gain if bond-rating agencies determine the company no longer risks a jury award that would hamper its ability to pay off its bonds.

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2 Photos

Photo: (1--Color) Machines pack cigarettes at the Philip Morris plant in Concord, N.C.

(2) Sacks of tobacco await auction at a warehouse in Darlington, S.C.

Associated Press