Receive free US & Canadian companies updates
We’ll send you a myFT Daily Digest email rounding up the latest US & Canadian companies news every morning.
Jay Powell may now be the individual with the greatest responsibility for resolving big civil lawsuits, known as “mass torts”. On Tuesday, US conglomerate 3M announced it had agreed to settle some 260,000 legal claims. Higher rates set by the Federal Reserve, which Powell chairs, might just have something to do with that.
The claimants alleged that 3M subsidiary Aearo had sold defective ear plugs to US armed services. The total cost of the settlement now is $6bn in cash and stock. The risk for 3M has been that the “mass tort” system in place would drag out jury trials, perhaps for decades.
Plaintiffs and their lawyers have evidently realised that their negotiating leverage is greatest — and 3M’s pockets deepest — right now. Cash in the far distant future discounted back is worth less when interest rates are high.
3M controversially tried to put Aearo into Chapter 11 bankruptcy with the aim of streamlining the litigation process. In June, a judge dismissed the petition, insisting Aereo and 3M lacked the requisite financial distress to use the bankruptcy system.
It has been a summer of settlements for 3M. In June, it agreed to pay $10.5bn to $12.5bn to US municipalities over PFAS or so-called “forever chemicals” linked to cancer.
Since the start of 2022, shares of 3M are down 40 per cent. Still, its enterprise value remains $70bn. The question for analysts and investors is when the stock will become attractive again.
The settlement payments for Aearo and PFAS are structured to pay out over several years. The annual cash flow impact may be severe enough to threaten 3M’s dividend which currently yields six per cent.
3M’s annual free cash flow is around $6bn while its dividend approaches $4bn. That spread will now be eaten up by victim payouts. However 3M will separate its healthcare products business. This will borrow to pay a $7bn dividend back to its parent.
3M shareholders now have greater clarity on when the business will be writing cheques and for how much. The group has attracted less criticism than Johnson and Johnson. The latter created a talc liabilities subsidiary to file for bankruptcy. Aearo had always been a real business within 3M.
Product liability victims clearly understand that dragging cases out is an expensive tactic now that the time value of money has gone up.
Read the full article here
