Altria Spinoff Would Liberate PMI

Source from:  tr.itsmyiq.com Aug 27, 2007 08/28/2007

Altria Group Inc. is likely to announce a spinoff of its Philip Morris International tobacco arm after a board meeting Wednesday. That would create a new company, unfettered by legal and public relations problems in the U.S., to blanket overseas markets aggressively. The report ran in the Wall Street Journal. Though Altria management has been largely mum about any plan to break up the two units - one based in Lausanne, Switzerland, and the other in Richmond, Va. - there are ample signs that it is heading down that path. Earlier this summer, Altria said its international tobacco business would no longer import about 57 billion cigarettes annually from its U.S. sister company and instead would gets its entire supply internationally, primarily from its own 42 manufacturing centers. The largest are in Holland, Russia, Germany, Turkey and the Ukraine. Philip Morris International produced a whopping 831.4 billion cigarettes last year, more than four times the 183 billion cigarettes its American sibling made for the U.S. market. Also telling: The international unit last month began providing Wall Street with more financial details about its four key regional markets -- breaking out the slowly declining European and Latin American markets (where quarterly cigarette volumes fell 0.9% and 2.6%, respectively) from the more stable Eastern Europe, Middle East and Africa (where cigarettes volumes rose 0.8%), and high-growth Asia (up 15.9%). Overseas growth contrasts with Philip Morris USA's volume, which shrank 3.3% in the latest quarter from a year earlier. For all of 2006, Philip Morris International had revenue of $48.26 billion, compared with $18.47 billion at Philip Morris USA. Ironically, one of the biggest rationales for the spinoff of the international business used to be the argument that it needed to move away from the shadow cast by the U.S. company's legal woes. Only a few years ago, legal challenges against Philip Morris USA seemed ominous enough that some speculated there was a chance the domestic cigarette company might be forced to file for bankruptcy protection. Yet those same litigation problems would have made a spinoff harder, with plaintiffs attorneys likely crying foul at any attempt to remove assets. Today, in the wake of several important courtroom victories, the litigation environment in the U.S. has changed significantly. And few if any antitobacco plaintiff lawyers would have legal grounds to be able to successfully block the spinoff of Philip Morris International, because at the moment merely four major class-action claims are pending against Philip Morris USA. The litigation situation aside, Altria investors feel there are plenty of compelling reasons for a breakup, which could be completed by early 2008. The intent is to give both companies new life, with greater product innovation and the capability to make acquisitions and aggressive moves to return some of their substantial free cash flow to investors. An independent international unit could use its own shares as currency in any deals. It is likely that management incentives would be linked to the share price of each respective tobacco unit, rather than to the performance of the global entity with all of its various markets lumped together. Nonetheless, any spinoff of the overseas business could potentially delay major share buybacks until 2008, because only after the companies are finally separated would their respective boards have the chance to mull such a move. Enditem