BAT makes provision for Quebec court case

5th Mar 2019 09:45

(Sharecast News) - British American Tobacco said it would take a £436m charge on its consolidated income statement in 2019 due to developments in the lawsuit brought by a group of Canadian smokers, though this will have no impact to cash flow. Last Friday, the Quebec Court of Appeal upheld a 2015 court decision that required BAT and two other cigarette makers to pay at least C$15.6bn (£8.9bn) of damages as part of near 20-year court case brought by a group of 100,000 smokers in Quebec.As part of the ruling, local subsidiaries of BAT, Philip Morris International and Japan Tobacco deposited roughly C$1.1bn into a court escrow account.BAT subsidiary Imperial Tobacco Canada was required to place C$758m (£436m) in escrow, with the final payment made in 2017 and the deposit held as an asset on BAT's balance sheet as of 31 December. Following the latest judgment, the subsidiary board have judged the "recoverability" of these funds is "less than virtually certain", leading to the decision to charged the provision to the group's consolidated income statement, which the company said will be treated as an adjusting expense. "There will be no impact from this charge to the ratio of adjusted net debt to adjusted EBITDA, with this decision having no impact to cash flow in 2019," it stressed.BAT, which was not a party to the proceeding and is not a party to the judgment, stated on Monday that the subsidiary intends to seek leave to appeal this judgment to the Supreme Court of Canada. Analysts at Jefferies on Monday suggested that, in a worst case scenario, the court will reiterate its requirement that BAT pay C$758m and PMI pay C$226m in six equal quarterly instalments, but felt it was unlikely the full amounts are ever settled."If the case was appealed and they lost again, a possible outcome is all three names declare bankruptcy. There would be no liability on the parent. Such action would be most likely at BAT, with the fine value way greater than the business value, but we think there is also an argument for bankruptcy at PMI and JT."