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Judge’s ruling may speed Kraft spin-off

Investors who have been salivating at the prospect of an Altria breakup may not have much longer to wait now that a federal judge has handed down a much-anticipated racketeering decision. The decision removes the legal cloud that had been hanging over the industry.
/ Source: The Associated Press

Investors who have been salivating at the prospect of an Altria breakup may not have much longer to wait now that a federal judge has handed down a much-anticipated racketeering decision.

“OK, now pop the cork!” Christopher Growe of A.G. Edwards & Sons wrote in a research note Friday. Citigroup analyst Bonnie Herzog wrote at the top of her note, “Get ready for Altria to move the cheese,” in reference to its long-planned spin-off of Kraft Foods Inc. Christine Farkas of Merrill Lynch wrote, “The date for Altria’s restructuring has very likely been accelerated.”

A decision issued after the market closed Thursday removes a legal cloud that had been hanging over the industry and also, importantly, removes a great deal of the uncertainty that had been holding back the breakup of the world’s largest cigarette maker.

Judge Gladys Kessler ruled that tobacco companies deceived smokers about the health hazards of smoking, but she said she did not have the ability to award substantial financial penalties. The Department of Justice had sued tobacco companies, seeking $14 billion in funding for smoking cessation programs and public education campaigns.

“Yesterday’s ruling is just about as good as it gets from the tobacco industry’s perspective and, in our view, is exactly the type of ruling that should make the Altria board feel comfortable with spinning off Kraft,” Prudential Equity Group analyst Robert Campagnino said in a research report.

Herzog said Altria, owner of the dominant Marlboro brand, could announce the first step of the breakup very soon. She noted that the company has been working on the breakup since early 2004 and is “absolutely ready to pull the trigger.”

Altria’s plans for restructuring include the spin-off of its Kraft Foods unit — maker of Jell-O, Kool-Aid and Oscar Mayer products — and the split of its two tobacco divisions, Philip Morris USA and Philip Morris International, into separate companies.

The tobacco company bought Nabisco in late 2000 and folded it into Kraft. It owns about 87 percent of Kraft, the No. 1 food company in the U.S.

William Ohlemeyer, associate general counsel for Altria, said the company is deciding whether to seek further review in the trial court or appeal directly to the U.S. Circuit Court of Appeals for the District of Columbia. The Department of Justice also has the option to appeal.

The defendants in the federal lawsuit were: Philip Morris USA Inc. and its parent, Altria Group Inc.; R.J. Reynolds Tobacco Co.; Brown & Williamson Tobacco Corp.; British American Tobacco Ltd.; Lorillard Tobacco Co.; Liggett Group Inc.; Counsel for Tobacco Research-U.S.A.; and the now-defunct Tobacco Institute.

“While the tobacco industry could end up paying millions of dollars (Altria likely makes that much overnight in interest on its cash) to comply with Judge Kessler’s judgment in the DOJ case, the industry does not have to fund national smoking cessation programs (estimated at $10 billion) or pay fines if youth smoking does not decline at certain targeted rates,” Campagnino wrote.

Kessler’s decision is the second significant legal ruling this summer. In early July, the Florida Supreme Court ruled generally in favor of the industry in the Engle case, led by pediatrician Howard Engle. The judge in that case decertified the class action and reversed a $145 billion damage award given by a jury.

Analysts expect further increases, too. Farkas raised her 12-month price target for Altria stock to $92 from $85. Herzog reiterated a buy rating and a $94 price target.

“The litigation landscape has never been brighter, and we expect new investors to take a fresh look at tobacco stocks,” Herzog said.