Any petty criminal knows that buying cigarettes in a low-tax jurisdiction and trafficking them to high-tax areas makes for some easy profits. A guy across the street from me used to move cartons of Altria Group's (NYSE:MO) Marlboros -- purchased at a reservation -- out of his rusty car trunk when he wasn't installing larger subwoofers. It's a common racket, but one that will be a bit tougher to accomplish in Europe in the coming years.
This week, the European Union (EU) announced an agreement with Altria subsidiary Phillip Morris International (PMI) that has the company shelling out $1 billion over 12 years to combat cigarette smuggling across borders in Europe. The EU has sued the firm in the past, claiming that PMI knowingly oversupplied countries with low taxes so that the sought-after smokes could be transferred, illegally, to other countries with higher sin tariffs.
Both PMI and the EU are taking a Johnny Tightlips approach to the agreement. They ain't sayin' nothin', except to note that the payoff is definitely not a fine or a settlement even though it lays to rest "all disputes."
The move leaves the door open for similar non-settlements from other tobacconists. One candidate might be R.J. Reynolds Tobacco Holdings (NYSE:RJR), against which the EU has filed a similarly motivated suit.
The non-settlement is definitely not cheap: It represents over a quarter of Altria Group's entire cash hoard, and it is nearly as much as the $1.2 billion in operating income that international tobacco sales generated for 2003. It may not be much to cheer about, but should be one less headache for investors -- at least until some slick state attorney decides to follow the EU's lead.
If you'd like to get Altria's monkey off your back, consider joining the Fool's Quitting Smoking discussion group.
Fool contributor Seth Jayson only smokes mouthfuls at a time, and only when he's trying to set a world record. He owns no stake in any company mentioned above. View his Fool profile here.
