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We believe investors have misread the shift in strategy by Senator Majority Leader Lott to back McCain's bill. Our sources in
the Republican leadership say the script remains:Senate passes big tobacco bill to buy political cover for Republicans;House
passes "skinny" tobacco/drug bill that differs markedly from Senate version;White House brokers deal between Senate/House in
conference that moves bill back toward June 20 agreement. Lott felt Republicans were at risk politically if they passed nothing.
We calculate that the changes in McCain's manager's amendment will cause the price increase needed after five years to drop
from $2.76/pack as voted out by the Senate Commerce Committee, to a $1.68/pack increase if McCain's amendment passes:
*Straight $1.10/pack excise tax over five years will replace fixed payment stream (payments volume adjusted after first year)
*Lookback penalties and liability cap also volume adjusted after first year.
*Lookback cap now $4 billion per year (from $3.5 billion per year),New company lookback penalty of $1,000/teen smoker.
*Liability cap raised to $8 billion per year, with no credit against payments;removable if miss lookback targets by >20pp.
*International marketing and packaging provisions struck;$.02/pack fee on all volume sold overseas eliminated
*Plaintiffs can bring suits against parents of domestic tobacco companies (couldn't in original McCain bill).
Many in Congress incorrectly perceive industry will come back to table if bill passes with revised McCain payment terms. If
industry does not return, settlements of state suits and liability cap are eliminated. Two key changes needed in House-Senate
conference to bring industry back to table:i) Liability cap must be unconditional (rather than removable if miss lookback targets
by 20pp) andii) Liability must be contained within domestic tobacco (cannot sue corporate parents for tort injuries).
Senate sources say there is still a decent chance (25-30%) this bill could blow up. Most contentious issues: allocation of proceeds
-- currently 40% to states (federal government gets to control 50% of this), 22% for smoking cessation, 22% to cancer research,
16% to farmers -- and attorneys' fees. Lott would then remove bill from the floor, and iron out differences over recess.
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The information set forth has been obtained from sources we believe to be reliable but is not guaranteed by us and may be incomplete. Such information and any views or opinions expressed herein are not to be considered as
representations by us or as a prospectus or offer to buy or sell any security. Investment information supporting a recommendation of a specific security or materials upon which a projection or prediction are based are
available upon request. Sanford C. Bernstein & Co., Inc. (the "Corporation") or one or more of its clients, officers, directors, stockholders, affiliates or employees may at any time hold, increase or decrease positions in
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