Loews to Spin off Lorillard Tobacco

Source from:  By VINNEE TONG, AP Business Writer Mon Dec 17 12/18/2007

The future of the U.S. tobacco industry came into sharper focus on Monday when Loews Corp. announced it would spin off its Lorillard cigarette subsidiary, positioning the maker of Newport, Kent and True brands to compete with rivals who are aggressively looking to replace cigarettes as a source of revenue. As American smokers buy fewer cigarettes, tobacco companies have started to look for alternatives such as cigars, chewing tobacco and snus, which are tea bag-like tobacco pouches placed between a cheek and gums and are popular in parts of Europe. An independent Lorillard could take on debt to pursue acquisitions or develop such alternatives on its own. A spinoff of the tobacco business could remove some legal risk and boost the market value of New York-based Loews, which is led by the Tisch family and also owns Loews Hotels, watchmaker Bulova Corp., CNA Financial Corp. and Diamond Offshore Drilling Inc. Loews shares rose 2.4 percent on Monday. Consumers have pulled back on buying cigarettes due to health concerns, smoking bans and higher taxes. Altria Group Inc., the parent company of the nation's largest cigarette maker, plans to announce on Jan. 30 the exact timing of when it will split Philip Morris USA and Lausanne, Switzerland-based Philip Morris International, creating two separate publicly traded tobacco companies. In its efforts to replace cigarettes, Richmond, Va.- based Philip Morris USA completed its purchase of cigar maker John Middleton Inc. last week, and started market tests of Marlboro-branded snus in the Dallas-Fort Worth area and Marlboro-branded chewing tobacco in Atlanta earlier this year. Reynolds American Inc., the nation's second-largest tobacco company, bought smokeless tobacco company Conwood Co. in May 2006, and has seen strong results from the Grizzly-brand moist-snuff. R.J. Reynolds Tobacco Company, which is Reynolds American's largest subsidiary, is also conducting market tests on a Camel-branded snus product. "In a tobacco market where other large players are going out as acquirers, Lorillard or Carolina Group would need to be positioned to do the same thing in order to remain in the top tier players," Rochdale Securities LLC analyst Steven McSorley said. Lorillard will soon begin test marketing its own snus, under the brand Triumph, Loews executives said Monday. The Triumph test product is part of a joint venture formed in October 2006 with Swedish Match North America Inc. to develop smokeless tobacco products. After the spinoff expected by mid-2008, Lorillard's headquarters will remain in Greensboro, N.C., and Martin Orlowsky will remain as president, chairman and chief executive of the tobacco business. Loews has been looking for growth in areas such as natural gas exploration. In June, Loews agreed to pay $4.03 billion for Dominion Resources Inc.'s natural gas operations, which have since been renamed HighMount Exploration & Production LLC. Loews chief executive Jim Tisch told analysts Monday that the board decided to do the spin-off because of growth in dividends from its other subsidiaries, as well as the development of a more benign U.S. litigation environment for tobacco companies. McSorley said the quickest way for Loews to begin to raise its own value was to separate from Lorillard. Loews shares rose $1.14, or 2.4 percent, to $47.94 on Monday, changing course after falling almost 6 percent in premarket trading when Moody's Investors Service noted that the spinoff would reduce the number of ways Loews makes money and leave Loews without the Lorillard's steady flow of dividends. "Even though the spinoff would eliminate the overhang of tobacco litigation, dividends from Lorillard still represent the majority of cash flow to Loews and a highly stable source of earnings and cash flow," Moody's vice president Janice Hofferber wrote. Loews' interest in Lorillard will be spun off to shareholders of Carolina Group and Loews in a tax-free transaction. "We had a role to play in the portfolio of Loews companies," Orlowsky said. "Frankly that role was to provide cash dividends up to the parent company." Once it is a separate company, Orlowsky said Lorillard would likely reduce its dividends, which had essentially been all of its profits. He said, "We will have more flexibility." Loews will redeem all outstanding Carolina shares in exchange for Lorillard shares, with Carolina Group stockholders getting one Lorillard share for each share they own. The Lorillard stock being distributed makes up about 62 percent of the company's outstanding shares. Loews will then offer the remaining 38 percent of Lorillard outstanding stock to shareholders who want to exchange their Loews shares for Lorillard's. If too few Loews shareholders take the exchange, the company will distribute the remaining Lorillard stock to Loews shareholders as a dividend. The spinoff is expected to close at the end of the second quarter, subject to approvals from the Internal Revenue Service and Securities and Exchange Commission as well as Loews' tax counsel. The deal does not require shareholder approval. Enditem