Philip Morris International (NYSE:PM) has sued the Australian government over a new law that makes plain packaging mandatory for cigarettes from December 2012. The Australian government recently passed a legislation that prohibits any logos and brand imagery on cigarette packages.  Instead, the names will be printed in a small font on a dull, olive green packets.  The packs will also contain large, graphical images depicting negative health effects of smoking. Philip Morris International currently controls about 40% of market share in Australia. The company competes with British America Tobacco (AMEX:BTI) and Imperial Tobacco Group (LSE:IMT).
We have a $75 price estimate for Philip Morris International, which is about 5% more than the market price.
Australia in Violation of Treaty
According to Philip Morris Asia (PMA), which manages PMI’s business in Asia, the Australian government is clearly in breach of the Australian-Hong Kong Bilateral Investment Treaty (BIT). The treaty was formed in 1993 and aims to create favorable conditions for greater investments and reciprocal protection for investments made in one country by investors from the other. The company is confident its legal arguments are strong and expects the damages to amount to billions of dollars.
Outcome Could be Crucial
This really could be the harbinger of things to come. The law could set the tone for an unprecedented wave of actions taken up by governments of various countries to discourage smoking. Governments of multiple countries have considered passing similar legislation so the outcome of this lawsuit could really decide how things will shape up for the tobacco industry in the years to come.
However, the tobacco industry has many positives to look forward to at the same time. Rising disposable incomes coupled with lax regulations in developing countries like China ensures the industry is helping drive volumes in particular.
To read more on tobacco growth story in Asia, read Asia Still Loves to Light Up Driving Philip Morris’ Growth.Notes:
- Philip Morris Asia Files Lawsuit Against the Australian Government Over Plain Packaging, The Sacramento Bee, November 28, 2011 [↩]
- Philip Morris Sues Australia Over New Tobacco Law, Salon, November 21, 2011 [↩]