3M: Combat Arms Potential Settlement and Recent Appointments Are Key Wins for Shareholders
Various reputable media outlets report that 3M MMM is nearing a roughly $5.5 billion settlement related to its Combat Arms earplugs. Consequently, we don’t expect to materially change our $131 fair value estimate, if at all. In fact, the nearly $5.5 billion figure is very close to our $4.9 billion estimate, and well below the market estimates we’ve seen floating around of $10 billion-$15 billion for Combat Arms. Even so, it’s still materially more than the $1 billion settlement trust 3M had initially proposed to resolve these issues.
We think news of the potential settlement figure is a big win for the company and its shareholders, particularly after it lost 10 of its 16 bellwether cases. Nonetheless, we retain our Very High uncertainty rating, for now, because of the lack of visibility pertaining to lingering liabilities over chemicals known as PFAS. These liabilities exclude environmental liabilities outside of the recent $10.5 billion-$12.5 billion settlement related to municipal drinking water. They also exclude personal injury suits, property damage, and non-U.S. suits. That said, we think the municipal drinking water system settlement could be the biggest hit 3M may take related to PFAS.
For now, we disagree with some analysts who claim that the settlement amount could merit negative credit rating activity and substantially higher leverage for 3M. Our assessment depends on the speed of potential payments, but we expect 3M will successfully extend these payments over a period of years, like the PFAS municipal water payments. If our assessment is correct, and these payments extend over five years or so, then 3M wouldn’t need to take on substantial additional leverage (or more leverage than it already has) to service its obligations. Our assessment also presumes 3M will tender its settlement payments to municipal water systems over 13 years, beginning next year. Said differently, we think the balance sheet can readily absorb this blow.
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