Altria Group Inc., the world's largest tobacco company, plans to spin off Philip Morris International after being pressured by investors who want faster overseas growth and less risk from U.S. smokers' lawsuits.
A final decision on the timing will be announced at a board meeting Jan. 30, Altria said today in a statement. The company also boosted its dividend 8.7 percent to 75 cents a share.
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A spinoff would complete the breakup of the former Philip Morris Cos., which traces its roots back to a London tobacconist in 1847, and leave it with the U.S. cigarette operations. Chief Executive Officer Louis Camilleri in March spun off Altria's 89 percent stake in Kraft Foods Inc., the world's second-largest food company.
"Ultimately it is the right move," said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania. He expects the international and U.S. companies to initiate a "generous share buyback program and pay a substantial dividend."
Camilleri, 52, would take over as chairman and CEO of Lausanne, Switzerland-based Philip Morris International. Michael Szymanczyk chief of Philip Morris USA, would become Altria's chairman and CEO.
"The opportunity here is to enhance our growth rate," Camilleri told analysts on a conference call. Altria also has a stake in brewer SABMiller Plc.
Tax Ruling
A separation of the two units will allow for savings of at least $250 million, including the closure of Altria's New York headquarters, Camilleri said.
About two-thirds of Altria's 600 New York jobs will be cut, he said. Some employees will be offered transfers to the Richmond, Virginia, headquarters of Philip Morris USA.
The U.S. unit, which accounts for one of every two cigarettes sold in the U.S., is dwarfed by Philip Morris International. The overseas division accounts for two-thirds of profit and three-fourths of revenue, and its shipments are rising while U.S. volumes decline.
The decision on the spinoff will be based on several factors, including a tax ruling from the U.S. Internal Revenue Service and the execution of several intercompany agreements, the cigarette maker said.
Share Performance
Altria, based in New York, rose 73 cents, or 1.1 percent, to $69.80 at 4:02 p.m. in composite trading on the New York Stock Exchange after reaching $70.98. The pullback occurred as the company made no mention of a buyback, said Russo, who handles $4 billion, including 5.4 million Altria shares through June.
Camilleri bowed to shareholders who favored the separation of Altria's international unit from legal risk and falling cigarette consumption in the U.S.
"Tobacco is growing overseas, while in the U.S. it's in decline, making a reasonable argument for separating the two entities," Matthew Kaufler, who helps Clover Capital Management Inc. handle $2.6 billion and supports a spinoff, said yesterday. The Rochester, New York-based firm owns more than 233,000 Altria shares.
The international unit, which has the biggest share of smokers in Italy, Germany, France and Spain, may accelerate acquisitions and resume share buybacks once operating independently, Bonnie Herzog, a Citigroup Inc. analyst in New York, wrote in a note Aug. 26. Altria spent more than $5 billion on acquisitions in Indonesia and Colombia in 2005 to spur growth in emerging markets.
Smokeless Products
Philip Morris USA will concentrate on developing Marlboro snuff and other smokeless products, Erik Bloomquist, a J.P. Morgan Securities Ltd. analyst in London, wrote Aug. 22.
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," leading some investors to favor spinning off the international unit, Bloomquist said. He rates Altria as "overweight."
The planned spinoff and "more favorable litigation environment" spurred Standard & Poor's to lower the outlook for $9.1 billion in debt to "stable" from "positive," indicating the agency is neither more or less likely to change its BBB+ rating.
Altria's cigarette ties stretch back 160 years, when Philip Morris opened a tobacco shop in London. Philip Morris & Co. was incorporated in New York in 1902 and introduced the Marlboro brand in the U.S. the mid-1920s.
Kraft Foods
The company bought General Foods in 1985 and Kraft three years later. Following its acquisition of Nabisco Holdings, the maker of Oreo cookies, in 2000, Philip Morris sold Kraft shares in an initial public offering the next year and later spun off the rest.
The company renamed itself Altria in 2003 to shift attention from its tobacco operations after a $246 billion settlement of health claims struck with U.S. states.
Szymanczyk, 58, took charge of Philip Morris USA in 2002 as discount cigarettes such as Commonwealth Brands Inc.'s USA Gold eroded the U.S. market share of full-price brands including Marlboro.
Paying for the 1998 health-care settlement forced Szymanczyk to raise prices, putting his top brands at a disadvantage to discount cigarettes that increased their share to about 13 percent in 2004 from 3 percent in 1998.
Philip Morris USA countered with discounts that helped its share of smokers climb to 50.5 percent last quarter from 48.5 percent three years earlier.
Altria 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.
To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina at 1348 or cburritt@bloomberg.net . Enditem
