Altria Holders May Back Off on Push to Split Tobacco

Source from:  bloomberg.com By Chris Burritt 07/18/2007

Altria Group Inc. Chief Executive Officer Louis Camilleri said in April he'd consider calls from shareholders to split the world's largest cigarette maker in two. Now investors may not want him to. In March, the company had spun off its 89 percent stake in Kraft Foods Inc. Speculation grew that its international tobacco division, growing faster than the U.S. cigarette operations, would be spun off next to further unlock shareholder value. Altria, which will probably report an 8 percent increase in second-quarter profit tomorrow, now may be better off taking on debt and buying back stock, some analysts and investors said. "If you had asked me two years ago, I'd say spin off international," said Brian Barish, who oversees $10 billion, including 3 million Altria shares, as president of Cambiar Investors LLC in Denver. "But now I'm decidedly mixed." In late 2004, Altria's Philip Morris USA unit faced three multibillion-dollar lawsuits, including U.S. Department of Justice racketeering charges seeking $280 billion in damages. The value investors placed on its international unit suffered as a result. Since then, the government litigation and two class-action smokers' suits in Illinois and Florida have gone in the industry's favor, putting Altria's share price on par with British American Tobacco Plc. Altria's price-to-earnings ratio -- share price divided by earnings per share -- is estimated at about 17 this year, ahead of London-based BAT's 16. That lessens pressure on Altria to spin off Philip Morris International, Barish said. Rising Value "Spinning or not spinning off Philip Morris International on its own is not what is going to unlock shareholder value in the long run," Filippe Goossens, a Credit Suisse analyst in New York, said last week. "The litigation environment has all but gone away from the valuation perspective at this moment." He rates the stock "outperform," and is one of 13 analysts who recommend buying Altria shares. Three recommend holding the stock. Altria's share price was as low as 4.6 times earnings in April 2003, when Philip Morris USA said it might seek bankruptcy protection if forced to post a $12 billion cash bond in the Illinois suit. Plaintiffs accused the company of deceiving smokers by advertising "light" cigarettes as less harmful. Seeking Buybacks Goossens said he spoke to several major shareholders who would prefer Altria repurchase $25 billion to $30 billion of its stock over splitting up. He declined to identify the investors. The company's market value is $150 billion. Camilleri, 52, who earned $34 million in 2006, declined an interview request, Altria spokesman Timothy Kellogg said. Shares of New York-based Altria declined 3 cents to $71.28 at 4:01 p.m. in New York Stock Exchange composite trading. They've increased 11 percent this year, while smaller rival Reynolds American Inc., the maker of Camel cigarettes, has fallen less than 1 percent. The stock of UST Inc., the largest U.S. snuff producer, has dropped 10 percent. Altria's second-quarter profit probably rose to $2.39 billion, or $1.13 a share, according to the average estimate of nine analysts surveyed by Bloomberg. Net income increased an average of 7 percent annually over the past five years, weighed down by higher costs for energy, cheese and other commodities at Kraft, which generated a third of Altria's revenue. Kraft is the world's second-largest food company behind Switzerland's Nestle SA. Higher Prices Higher Marlboro cigarette prices in the U.S. and rising shipments abroad pushed Altria's second-quarter profit higher, Goossens said. Investors such as Matthew Kaufler, who helps manage $2.6 billion, including 231,401 Altria shares, at Clover Capital Management Inc. in Rochester, New York, still favor a separation of the U.S. and international tobacco units. "I would like to see it happen now," said Kaufler. "The international unit provides more of a growth play with Marlboro dominating a lot of international markets." Whether Altria splits the tobacco units or not, Kaufler said he expects a resumption of share buybacks and dividend increases. "I don't see how as shareholders we can lose," he said. More Cash Altria's shares may be worth $79 in 12 months, 11 percent more than yesterday's closing price, Judy Hong, a Goldman Sachs Group Inc. analyst in New York, wrote July 8. The company stopped buying its shares in 2003 after it lost access to the commercial-paper market following a ruling in a class-action smokers' suit in Illinois that limited its financial flexibility. Altria last year projected that, for the first time, its cash will exceed debt by close to $2 billion in 2007. The company estimated its cumulative cash flow from 2006 through 2010 will total $51 billion. "This company could easily handle $30 billion in debt," said Barish. Altria may signal its next step when its board meets Aug. 29, analysts said. Camilleri said in 2005 that once split, Kraft and Altria would probably purchase shares. Kraft plans to buy back $5 billion in stock over the next two years. To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina at 1348 or cburritt@bloomberg.net . Enditem