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Jarislowsky Fraser president Len Racioppo is wondering what the folks at Philip Morris International have been smoking.

Philip Morris, you may recall, is taking a $2-billion run at one of Mr. Racioppo's favourite holdings, cigarette maker Rothmans. The friendly, $30-a-share offer was announced last week, and Jarislowsky Fraser is the single largest shareholder, with a 14-per-cent stake.

While it's far too early in the game for Mr. Racioppo to show his hand on Rothmans, it doesn't take much of a poker player to guess which way he's leaning ahead of an expected October vote on the takeover, which requires 66.6-per-cent support from shareholders.

Based on what he's seen so far from Philip Morris, Mr. Racioppo has two specific issues.

First off, Rothmans agreed to skip its 35-cent quarterly dividend, due in September, to help pave the way for this offer. That means an extra $24-million stays in the corporate coffers. Mr. Raccioppo sees this as money that's coming right out of his clients' pockets - Jarislowsky Fraser receives $3.4-million in dividends from Rothman every thee months.

“As shareholders, that's our dividend. The company earned that money in the last quarter, before this bid was announced,” said Mr. Racioppo. He said the recent trend towards discontinuing dividends at takeover targets - it also happened at BCE - means “buyers are taking back cash that rightfully belongs to shareholders.”

Then there's the matter of just who is paying the $550-million fine that the two companies agreed to last week when they settled a long-running RCMP investigation into cigarette smuggling.

Rothmans is directly or indirectly on the hook for $410-million of that penalty. Philip Morris is putting up $140-million. In other words, the Canadian company is shouldering 75 per cent of the cost of the settlement.

Yet the Canadian operating subsidiary is 60-per-cent owned by Rothmans, and 40-per-cent held by Philip Morris. In Mr. Racioppo's view: “The breakdown of the settlement tilts in Philip Morris's favour.”

Given these misgivings, will Jarislowsky Fraser refuse to tender, and instead lead the battle for a better offer? Mr. Racioppo isn't saying just yet. He wants to see the details of the Philip Morris offer, scheduled to be mailed next week. The paperwork will include details of a favourable fairness opinion from Rothmans adviser BMO Nesbitt Burns.

If history is any guide, look for this $51-billion fund manager to go to the wall for a better deal. Given their self-interest and the respect that Jarislowsky Fraser commands, it's also logical to expect a great many portfolio managers will line up behind any push for a higher offer. All of which promises a terrific exit from this holding for Jarislowsky Fraser clients, who first bought into Rothmans at $6 a share.

On trading desks, there's a widespread belief that Philip Morris executives are going to have to come up with at least another $1 a share to convince Mr. Racioppo they haven't been smoking something funny, and deserve shareholder support for the Rothmans takeover offer.