August 2025: Imperial Tobacco Canada exits bankruptcy protection
British American Tobacco (BAT)’s Canadian affiliate, Imperial Tobacco Canada (ITCAN) formally exited protection under the Companies’ Creditors Arrangement Act (CCAA). ITCAN stated that the Court-approved Plan of Compromise and Arrangement concludes the tobacco litigation provides maximum recovery for claimants while bringing stability to the business and its stakeholders.
ITCAN also underlined that black-market accounts for over 30% of all tobacco sales in Canada and threatens the stability of the Court-approved Plan by putting pressure on the legal, regulated market sales that directly fund annual payments to claimants.
August 2025: Ontario court approves an unprecedented C$909 million counsel fees for the C$32.5 billion tobacco settlement
The Ontario Superior Court of Justice approved C$909 million (US$660 million) in class counsel fees for lawyers who litigated various claims against tobacco companies across three decades, stating that while the lawyers’ fee request was “unheard of in Canadian legal history,” the court could not find “a principled basis” on which to reduce the fee, either. The Court also instructed lawyers to set aside a portion of their fees to make up for any shortfalls in class members’ payouts. The chief justice warned that the case is unique and that the exceptional class counsel fees awarded should not be considered to have any precedential value.
March 2025: Ontario Superior Court approved the C$32.5 billion tobacco settlement
Ontario Superior Court Chief Justice approved the C$32.5-billion plan, calling the milestone as a “momentous achievement in Canadian restructuring history” and highlighting the impact of the court’s approval on the class action members, whose case began in the late 1990s.
The C$32.5-billion settlement was first proposed in October 2024 after years of mediation between three tobacco companies – Rothmans, Benson & Hedges (RBH) of Philip Morris International, Imperial Tobacco Canada (ITCAN) of British American Tobacco and JTI-Macdonald Corporation of Japan Tobacco – and their creditors, which include plaintiffs in two Quebec class-action lawsuits as well as provincial and territorial governments seeking to recoup smoking-related health-care costs. The plan, crafted by the monitors appointed to each company in collaboration with a mediator, calls for the companies to pay more than C$24 billion to provinces and territories over about two decades, while plaintiffs in two class-action lawsuits in Quebec will get more than C$4 billion to split between them. Another C$2.5 billion will go to compensate Canadian smokers not included in the lawsuits, and more than C$1 billion will go to a foundation to fight tobacco-related diseases. Under the terms of the settlement, companies will pay all but C$750 million of their aggregate cash on hand upfront and the majority of their after-tax income thereafter until the full amount is paid.
March 2025: Philip Morris International, British American Tobacco and Japan Tobacco agreed on the C$32.5 billion Canadian settlement
Canadian subsidiaries of three major tobacco companies, Rothmans, Benson & Hedges (RBH) of Philip Morris International, Imperial Tobacco Canada (ITCAN) of British American Tobacco and JTI-Macdonald Corporation of Japan Tobacco filed materials with the Ontario Superior Court of Justice in joint support of plans to reach a settlement of all pending tobacco-related claims in Canada, subject to proposed amendments being approved by the Court.
In October 2024, the Court-appointed Mediator and the Companies’ Creditors Arrangement Act (CCAA) Monitors publicly proposed plans under which the three companies would pay a total of 32.5 billion Canadian dollars in aggregate to settle all pending tobacco product litigation in Canada. Japan Tobacco and Philip Morris International objected the proposed settlement, mainly due to the allocation of the aggregate settlement amount. Three tobacco companies seemingly reached an agreement on the terms of allocation of payments between them in February 2025.
As a result of the agreement, Japan Tobacco will record a ¥400 billion (US$2.66 billion) provision for litigation losses related to the payment of the settlement amount as an operating expense in fiscal year 2024.
February 2025: Philip Morris International objects the proposed plan while recording an impairment charge of US$2.3 billion
Philip Morris International (PMI)’s Canadian affiliate, Rothmans, Benson & Hedges (RBH) filed an objection to approval of the proposed settlement plan (for a comprehensive resolution of tobacco product-related claims and litigation in Canada) with the Companies’ Creditors Arrangement Act (CCAA) court. Moreover, based on the narrowed range of possible outcomes with respect to the allocation of the aggregate settlement amount of C$32.5 billion, PMI determined that the estimated fair value of its investment in RBH was lower than its carrying value and recorded a non-cash impairment charge of US$2.3 billion in the FY24 statement of earnings.
Since the first quarter of 2019, PMI’s reported and adjusted EPS, net debt and other financial results have excluded RBH. If the CCAA court approves the plan as proposed and it is subsequently implemented, RBH is likely to remain deconsolidated from PMI’s financials under U.S. GAAP. However, subject to the terms and requirements of the final settlement plan, the payment of certain dividends from RBH to PMI is possible in the future. These payments will be incremental to PMI’s cash flow and adjusted diluted EPS.
December 2024: Creditors approved the proposed C$32.5 billion settlement
Representatives for the creditors, which include provincial governments seeking to recover smoking-related health-care costs as well as plaintiffs in two Quebec class-action lawsuits, voted on the proposed settlement plan with the tobacco companies in a virtual meeting and overwhelmingly supported the proposal1. The C$32.5-billion settlement between three tobacco companies – JTI-Macdonald (Japan Tobacco), Rothmans, Benson & Hedges (Philip Morris International) and Imperial Tobacco Canada (British American Tobacco) – and their creditors was announced in October 2024 after more than five years of negotiations. See below for further details.
Meanwhile, lawyers representing tens of thousands of Quebecers in two class-action lawsuits against three major tobacco manufacturers will seek to receive more than C$900 million in fees for their work in the landmark case that has spanned decades. The documents filed in court request approval for a notice that would be sent to the class-action members about the payment being sought for more than 175,000 hours of work. The payment requested by the lawyers represent 22% of the (more than) C$4 billion earmarked for the Quebec plaintiffs.
Before the settlement plan can be implemented, it must obtain the approval of the court. The court hearing is scheduled in late-January 2025 and will also include a motion for approval of the legal fees. Parent company of Imperial Tobacco Canada, BAT, announced that they hope to have more clarity on the financial impact of the Settlement in Canada before issuing their FY25 guidance on February 13, 2025.
November 2024: The creditors vote on the proposed C$32.5 billion settlement will take place in December 2024
Ontario Superior Court Chief states that any outstanding issues regarding the proposed C$32.5 billion settlement between three major tobacco companies and their creditors should be solvable in the coming months2.
JTI-Macdonald Corp., one of the three tobacco companies involved, previously objected to the plan in its current form and asked the court to postpone scheduling the vote until several issues were resolved. The other two companies, Rothmans, Benson & Hedges and Imperial Tobacco Canada, didn’t oppose the motion while stating that they retained the right to contest the proposed plan down the line.
In order to have creditors vote on a proposal, the Court must be satisfied the plan isn’t set to fail either at the creditors or court approval stages due the unresolvable issues. In a written decision, Ontario Superior Court Chief released the reasons for approving a motion to have representatives for creditors review and vote on the proposal in December 2024. The Judge said it was clear that not all issues had been resolved at this stage of the proceedings. He pointed to outstanding issues between the companies regarding their respective shares of the total payout, as well as debate over the creditor status of one of JTI-Macdonald’s affiliate companies. However, lawyers representing plaintiffs in two Quebec class actions, those representing smokers in the rest of Canada, and 10 out of 13 provinces and territories have expressed their support for the proposal. Moreover, JTI-Macdonald’s lawyer acknowledged that the issues were solvable.
The proposed C$32.5 billion settlement will bring all pending tobacco product litigation in Canada to an end, settling claims of more than C$1 trillion. It is estimated that the three tobacco companies will pay the entire settlement amount in about 20 years.
October 2024: Japan Tobacco opposes the proposed C$32.5 billion settlement
JTI-Macdonald Corp., Japan Tobacco’s Canadian subsidiary, filed a document with an Ontario court indicating it does not support the settlement proposal due to the critical outstanding issues3. The document was filed ahead of a hearing to determine the next steps for the proposed plan of arrangement presented on October 17, 2024. In a separate court filing, Philip Morris International’s Canadian subsidiary, Rothmans, Benson & Hedges (RBH) indicated its agreement to set a date for the creditors’ vote while reserving the right to object to the proposal at a later stage in the process. RBH underlined that the allocation of the C$32.5 billion settlement among the tobacco companies is an unresolved issue which poses risk of substantial objections, further complications and delay.
The proposal would see the Canadian subsidiaries of three major tobacco companies, Imperial Tobacco Canada (ITCAN) of British American Tobacco, RBH and JTI-Macdonald, pay C$32.5 billion to provinces & territories and smokers & their heirs. Before it can be implemented, the proposed plan must be voted on by creditors, which include plaintiffs in two class-action lawsuits in Quebec as well as provincial governments seeking to recover smoking-related health costs. It must also be approved by the court. See below for further details.
October 2024: Three tobacco majors are set to pay C$32.5 billion (US$ 23.5 billion) to settle legal claims in Canada
After losing the appeal in two Quebec class-action lawsuits (with nearly C$15 billion compensation granted to 100,000 smokers in the province), Canadian subsidiaries of three major tobacco companies, Rothmans, Benson & Hedges (RBH) of Philip Morris International, Imperial Tobacco Canada (ITCAN) of British American Tobacco and JTI-Macdonald Corporation of Japan Tobacco, sought creditor protection under the CCAA (Companies’ Creditors Arrangement Act) in Ontario in March 2019. The order from the Ontario Superior Court of Justice allowed the companies to conduct their business in the ordinary course while restructuring their affairs. As part of the CCAA process, the CCAA court imposed a comprehensive stay of all tobacco product-related litigation pending in Canada against the tobacco companies as they seek resolution of all such litigation. That stay remains in place until October 31, 2024, and is expected to be extended.
Following 5-year long negotiations with their creditors, on October 17, 2024, the court-appointed mediator filed in an Ontario court substantially equivalent plans for each company (“Proposed Plan”) outlining a comprehensive resolution of tobacco product-related claims and litigation in Canada against the three companies4. The Proposed Plan will broadly dismiss claims and related litigation against the three tobacco companies relating to the manufacture, marketing, sale, use of or exposure to combustible and traditional smokeless tobacco products – 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.
Under the Proposed Plan, three companies will pay an aggregate settlement amount of C$32.5 billion (US$23.5 billion). This amount will be funded by
(1) an estimated upfront payment of C$12.5billion which is equal to the companies’ cash and cash equivalents on hand in Canada plus certain court deposits (subject to an aggregate withholding of C$750 million for working capital inclusive of cash pledged as collateral)
(2) annual payments based on 85% of the companies’ net income after taxes (excluding that generated by alternative nicotine products) until the aggregate settlement amount is paid – with 5% reduction foreseen in payouts (from the after-tax net income) every five years until reaching 70% payout ratio.
The proposal must still go through several steps before it can be put into action, including any further negotiations between the parties, voting by claimants and approval by the CCAA court. According to a schedule proposed by the court-appointed mediator, voting on the Proposed Plan would occur in December 2024. If accepted by claimants, a hearing to consider approval of the Proposed Plan would then be expected in the first half of 2025.
Since Q1 2019, PMI’s reported and adjusted EPS, net debt and other financial results exclude the Canadian affiliate, RBH. PMI states that a reconsolidation would be incremental to PMI’s cash and equivalents, cash flow, adjusted EBITDA, adjusted operating income, and adjusted EPS numbers5. RBH has not paid dividends to PMI since May 2015. As of June 30, 2024, RBH held ~C$5.5 billion (~US$ 4 billion) in cash and cash equivalents. For the full year 2023, RBH reported 5.1 billion domestic sales volumes, C$1.2 billion (US$900 million) in net revenues, and held ~36% volume share of the cigarette category in Canada. The carrying value of PMI’s equity interest in RBH is US$3.3 billion, recorded as an equity security on PMI’s balance sheet.
We estimate C$32.5 billion aggregate settlement to be shared as follows: C$17 billion by BAT, C$11.5 billion by PMI and C$4 billion by Japan Tobacco. BAT’s share of the judgement in Quebec class actions were ~60%. We believe BAT’s share this time will be lower the Quebec case, but will still be more than 50% due its historically strong market position (with 50% or more market share).
PMI is likely to make an upfront payment of C$5 billion and pay out the remaining C$6.5 billion over the next 12-14 years. We also expect PMI to record a total impairment charge of ~US$1.5-2 billion if the Proposed Plan is implemented. Nevertheless, many market analysts assume zero or only marginal value for PMI’s Canadian operations. Following this settlement, RBH’s value is likely to be lifted to ~US$1.0-1.5 billion – with upside potential if RBH can demonstrate some success in the commercialization of IQOS and VEEV (- noting that the net income from these products are excluded from the settlement payments).
With less cash at hand (C$3.4 billion as of June 30, 2024) and the lion’s share in settlement amount to be paid (C$17 billion or more), BAT’s traditional tobacco business in Canada carries negative value based on the Proposed Plan. The open question is: what is the value potential of BAT’s alternative nicotine (VUSE, glo, ZONNIC) and beyond nicotine business in Canada? Initial market reaction implies “not large enough” to find any upside in this settlement.
Further Readings:
References:
- https://www.cbc.ca/news/health/tobacco-lawsuits-1.7409542 ↩︎
- https://www.cp24.com/news/canada/2024/11/05/proposed-325b-tobacco-deal-not-doomed-to-fail-judge-says-in-ruling/ ↩︎
- https://financialpost.com/news/tobacco-company-opposes-settlement-provinces-smokers ↩︎
- http://cfcanada.fticonsulting.com/imperialtobacco/motions.htm ↩︎
- https://www.pmi.com/media-center/press-releases/press-details/?newsId=28076 ↩︎
