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Altria to spin off Philip Morris International

Altria Group plans to spin off its Philip Morris International tobacco unit, a move designed to give the overseas maker of Marlboros and other cigarette brands more freedom to pursue sales growth in emerging markets.
Altria Group plans to spin off its Philip Morris International cigarette unit, its board announced Wednesday.
Altria Group plans to spin off its Philip Morris International cigarette unit, its board announced Wednesday.Mel Evans / ASSOCIATED PRESS
/ Source: The Associated Press

Altria Group plans to spin off its Philip Morris International tobacco unit, a move designed to give the overseas maker of Marlboros and other cigarette brands more freedom to pursue sales growth in emerging markets.

The plans announced Wednesday would leave Altria with its much smaller domestic tobacco business that nonetheless still ranks as the biggest in the United States.

The spin-off would clear the international tobacco business from the legal and regulatory constraints facing its domestic counterpart, Philip Morris USA.

The company’s board announced it would finalize its decision and give the exact timing of the spin-off at its board meeting on Jan. 30.

Altria Chief Executive Louis C. Camilleri will become the new CEO of Philip Morris International, once the spin-off is completed. PMI’s current CEO André Calantzopoulos has agreed to become its chief operating officer and president.

Succeeding Camilleri at Altria would be Michael E. Szymanczyk, the current CEO of Philip Morris USA.

The company plans to close its New York City headquarters as part of the spin-off plans, helping save at least $250 million in overhead costs annually, Camilleri said on a conference call. Altria’s offices will be moved to Richmond, Va., where Philip Morris USA is based, along with some jobs. PMI will maintain a small office in New York. About 400 of 600 current New York employees will lose their jobs, Camilleri said.

The proposal must be cleared by the Internal Revenue Service and the Securities and Exchange Commission, the company said in a statement.

A spin-off of PMI would be the latest step in a restructuring process started in March when New York-based Altria Group Inc. spun off its majority stake in Kraft Foods Inc.

In addition to the tobacco businesses, Altria owns Philip Morris Capital Corp., a finance company that is currently being wound down, and a 29 percent stake in London-based SABMiller PLC, which brews Miller Lite beer.

Under a spin-off, Altria shareholders would get shares in a stand-alone Philip Morris International.

Executives at the international cigarette company’s Lausanne, Switzerland, headquarters oversee operations in more than 160 countries.

Sales at Philip Morris International are more than double those at the U.S. unit, with 2006 revenues at $48.26 billion compared to Philip Morris USA’s $18.47 billion.

Last year, Philip Morris International sold 831 billion cigarettes, making it the world’s largest nongovernment tobacco company in terms of volume. It holds 15.4 percent of the global market and its growth is expected to continue at a healthy clip.

Morgan Stanley analyst David Adelman believes the break-up is a good long-term strategy.

“There is little evidence that the existing holding company structure added real operational value (whereas it unequivocally adds cost),” Adelman told investors in a research report Wednesday. He said that separately the businesses could be more aggressive on share buybacks, cutting costs and introducing new products. Both should benefit from an improvement in the cigarette pricing environment, Adelman said.

To capture sales overseas, PMI has bought majority stakes in existing foreign tobacco companies, such as in Mexico, the Dominican Republic and Pakistan.

Damon Moglen of the Campaign for Tobacco-Free Kids activist group says the spin-off should “set off global alarms,” especially in the fast-growing markets in China, Indonesia and the Phillippines as well as pockets of Africa and Latin America.

“This is an addiction that has a clear and very scary connection to poverty, that is all the more relevant in the developing world,” he said.

Altria’s overall reorganization had been delayed as the company defended itself against a slew of lawsuits in the U.S. and waited until it could assure investors that it had secured a more predictable litigation environment.

Several class-action lawsuits are still pending. Adelman said “it would be naive to deny” there is a chance plaintiffs in those cases could seek to stop the PMI spin-off, although he thinks they wouldn’t ultimately succeed. None challenged Altria in its Kraft spin-off.

Philip Morris USA — with nearly half of the total U.S. cigarette market — has reported consistently declining cigarette sales as Americans smoke less. Volume fell 3.3 percent in its most recent quarter, while volume at PMI rose by 3.3 percent in the same period.

In anticipation of a break-up of the Philip Morris businesses, Altria has in recent months prepared the two units to operate independently, including plans to completely separate their manufacturing operations.

Altria plans to close a plant in North Carolina and shift all domestic manufacturing to Richmond by the end of 2010. All international manufacturing, including the production of about 57 billion cigarettes now made in the U.S., will be moved to overseas plants by the third quarter of next year, the company said in June.

To offset its declining cigarette sales, Philip Morris USA is increasing its marketing of moist chewing tobacco and other smokeless products, most recently ramping up its use of the Marlboro brand to try to capture brand loyalists.

Philip Morris USA also sells cigarettes under the Virginia Slims, Parliament and Basic brands.

Standard & Poor’s rating agency revised its outlook on Altria debt to stable from positive, citing a slightly weaker risk profile. Moody’s credit rating agency affirmed its stable outlook. S&P said the Altria had about $9.1 billion outstanding debt as of June 30.

The company announced it would increase its regular quarterly dividend by 8.7 percent to 75 cents a share. The higher dividend will be paid Oct. 10 to shareholders of record as of Sept. 14.

Altria shares rose 51 cents to $69.58 in afternoon trading Wednesday.