By Dean Foust
For years, critics have griped that the Tisch family runs Loews Corp. (LTR ), the publicly traded holding company it controls, as its fiefdom. They're hard to challenge. The Tisch family owns 30% of the stock and holds 5 of 13 board seats. They get nice perks. The company's 74-year-old co-chairman, Preston R. Tisch, has the use of a Manhattan apartment in a company-owned hotel--a benefit worth $1.8 million over the past three years, according to the 2001 proxy. Meanwhile, the average 4.5% annual return of Loews shares over the past five years pales against the 10.7% return of the Standard & Poor's 500-stock index. The Council of Institutional Investors, a pension-fund trade group, has repeatedly singled Loews out for its underperformance. (Loews officials wouldn't comment.)
Now, the Wall Street hype machine says that the younger Tisches are paying outside investors new respect. The evidence: James S. Tisch, Loews's 49-year-old chief executive, plans to launch a tracking stock in the coming weeks for its Greensboro (N.C.)-based subsidiary Lorillard Tobacco Co. When he unveiled the plan last October, analysts hailed it as an unlocking of the hidden value of Lorillard, which generates roughly a quarter of Loews's revenues but more than 60% of profits, according to Prudential Securities Inc. At less than six times projected 2002 profits, Carolina Group, the new tracker, could rise 10% to 20%, bulls say.
But on closer look, the Lorillard offering looks less like a boon for Loews's shareholders than a way to milk a cash cow that's past its prime. As the offering document states, Loews plans to plow the $800 million to $1 billion it expects from Carolina into its other holdings, such as insurance, oil drilling, and watches.
So what are investors likely to get from the tracker? Not much. They'll own shares representing 17.8% of Lorillard, the nation's third-largest cigarette maker after Philip Morris Cos. and R.J. Reynolds Tobacco Holdings Inc. That entitles them to a 6.7% dividend, but the shares don't reflect any direct claim on Lorillard's assets, as a spin-off would. Those stay with Loews, as do the offering's proceeds and Lorillard's cash flow. Carolina Group investors won't have much voice either: Ten Carolina shares equal one Loews share. "It's a good deal for the Tisches--they raise $1 billion and keep the cash flow--but would I want to invest in Carolina Group? No. It's heads they win, tails I lose," says Joseph W. Cornell, president of researcher Spin-off Advisors LLC.
Another problem: Despite a 6% rise in revenues in the first nine months of 2001, to $3.4 billion, Lorillard's profits declined 14.8%, to $475 million, due to litigation expenses and eroding market share among its discount brands, the prospectus says. And Lorillard's flagship Newport brand faces aggressive competition.
What investors will get in spades is legal risk. Lorillard is named in 4,275 lawsuits claiming it, like other tobacco companies, hid the risks of smoking. A possible ticking bomb is the Engle class action in Florida. A jury hit the industry with a $145 billion judgment. Lorillard's share is $16.25 billion. Loews executives declined comment, citing Securities & Exchange Commission restrictions. But the prospectus says that if the Engle judgment stands, it "could result in the loss of all or substantially all of the value of any outstanding shares of Carolina Group stock."
Many Wall Street analysts say the odds Lorillard will have to pay out in the Engle case, or any others, have shrunk since the industry settled with the states. Anti-tobacco activists disagree. "There's no evidence the litigation risk is receding," says Richard Daynard, a Northeastern University law professor who heads the Tobacco Products Liability Project, which provides research for suits against the industry. "They're basically buying themselves a partner for litigation risk. As usual, Larry Tisch is a lot smarter than Wall Street analysts." Given the risks, those who see this as a great investment may have smoke in their eyes.
Foust covers the tobacco industry.