Altria May Set International Unit Spinoff This Week

Source from:  By Chris Burritt Aug. 27 (Bloomberg) 08/28/2007

Altria Group Inc., the world's largest tobacco company, may say this week that it will spin off its Switzerland-based international unit as investors seek overseas growth and reduced exposure to smokers' lawsuits. There's as much as a 90 percent chance that Altria's board will decide to split off Philip Morris International after directors meet Aug. 29, Bonnie Herzog, a Citigroup Inc. analyst in New York, wrote in a note to investors yesterday. "Philip Morris International will become even more aggressive with its acquisition strategy," said Herzog, who rates Altria shares "buy." The stock may climb 8 percent on a spinoff announcement, she said. Chief Executive Officer Louis Camilleri told investors in 2004 that Altria was considering a breakup after lower profit from its Kraft Foods Inc. unit hurt earnings. Once the New York- based company spun off Kraft in March, speculation grew that the international unit would be next. Dawn Schneider, an Altria spokeswoman in New York, declined to comment on speculation about the board's meeting. Altria shares rose 89 cents, or 1.3 percent, to $70.08 at 4 p.m. in New York Stock Exchange composite trading. The stock has advanced 6.3 percent since the March 30 spinoff of Northfield, Illinois-based Kraft, the world's second-largest food company. Philip Morris International generates two-thirds of Altria's profit. A breakup will probably occur early in 2008 after the board sets a timetable this week, analysts said. Seeking Demand The international division may attract investors who think rising cigarette demand in Eastern Europe, Asia and other emerging markets will help bolster the stock price, Erik Bloomquist, a J.P. Morgan Securities Ltd. analyst in London, wrote Aug. 22. The possibility that the U.S. Food and Drug Administration will start regulating tobacco might also spur investors to favor shares of the international unit, Bloomquist said. He rates Altria ``overweight.'' Cigarette consumption is declining 1 percent to 2 percent a year in the U.S., and a potential increase in federal tobacco excise taxes poses "a near-term threat," Bloomquist said. Philip Morris USA is trying to bolster revenue with snuff sold under the Marlboro brand, expanding its reach in the $3.7 billion-a-year smokeless tobacco market. Marlboro accounts for four in 10 U.S. smokers, who spend $70 billion a year on cigarettes. Separation Signal A plan by Philip Morris USA to close its North Carolina factory and increase European production signaled Altria is preparing to separate the units, said investors including Herb Achey, who helps U.S. Trust in New York manage $265 billion. The firm had 22.4 million Altria shares as of June. The shutdown of the facility, announced in June, will shift U.S. cigarette production to Richmond, Virginia, where Philip Morris USA is based. Credit Suisse analyst Filippe Goossens, who is based in New York, would rather Altria buy back as much as $30 billion in shares over the next three years than split the U.S. and international units. U.S. litigation risk has declined in the past three years, erasing one of the primary reasons to break up the company, he said. In late 2004, the 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. Less Litigation 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 London-based British American Tobacco Plc, the second-largest tobacco company by market value. Buying back shares, boosting U.S. snuff sales, accelerating cost cuts and expanding faster into emerging markets "can create more sustainable shareholder value than just spinning off Philip Morris International to shareholders," Goossens said. Even so, Goossens said, "market expectations still imbed a 70 percent probability that the board will ultimately opt to spin off Philip Morris International." Altria's two units generate annual cash flow after capital expenditures of almost $10 billion. Once separate, the units can accelerate share buybacks and acquisitions, Christopher Growe, an A.G. Edwards & Sons Inc. analyst in St. Louis, said in an investors note Aug. 15. He rates Altria as a "buy." Growe said he expects Altria to increase its dividend 8.7 percent to $3 a share on Aug. 29 as it announces the spinoff. To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina at cburritt@bloomberg.net. Enditem