from Altria Group that the company was spinning off its Kraft Foods unit in March was long anticipated and warmly welcomed by investors, but the ramifications of the move will be felt far beyond the financial community: Altria’s move toward a renewed, dedicated focus on its tobacco business is a strong vote of confidence in the future of the industry.
Altria acquired Kraft in 1988 for $13.1 bn in cash. Its separation is a sign that the cloud of litigation that has hung over Altria and other U.S. tobacco companies for decades is dissipating.
C.e.o. Louis Camilleri first hinted at his intention to restructure the company into two or three entities in November 2004. But that was contingent on improvements in the litigation environment. Indeed, moving ahead before at least three outstanding litigation issues were resolved could have exposed the company to charges of “fraudulent conveyance” or disposing of assets to protect them from being used to pay damages. Then, last year Philip Morris USA, Altria’s U.S. division, won several big legal victories, setting the stage for the breakup.
With the Kraft spinoff out of the way, Altria is now in a stronger position to pursue acquisitions in the United States and overseas. In America, the maker of Marlboro cigarettes is expected to make a strategic acquisition in the high-margin smokeless arena, while Philip Morris International may make some moves toward the consolidation of the global tobacco industry.
“Given past statements about long-term acquisition opportunities in the United States and elsewhere, we believe Altria ex-Kraft is well positioned to be a buyer of other tobacco assets, notably UST at home and Imperial abroad,” Deutsche Bank analyst Marc Greenberg wrote in a report.
Altria’s spinoff of Kraft is part of a long-term revamping plan that may ultimately split the domestic and international tobacco businesses into two companies because Altria thinks they would have more value as independent companies.
For example, Philip Morris International would no longer be dragged down by problems associated with smoking in the United States, like diminished demand and government intervention.
The future prospects are particularly attractive in developing countries where smoking has not yet declined like it has in more developed parts of the world. In China, for instance, Philip Morris International signed a deal in 2005 that allows it to manufacture and sell Marlboros to the country’s 350 mn smokers.
But even in the United States, with 45 mn smokers, Philip Morris USA continues to generate sizable profits by raising prices and developing cigarettes that are less harmful, as well as making overtures into the growing smokeless category.
“The exciting part for me,” said Bonnie Herzog, an analyst at Citigroup, “is that tobacco use today will evolve. It’s unlikely that there will ever be a 100% safe cigarette, but we feel that a reduced-risk cigarette is on the horizon.”
All in all, it’s positive news for Altria — and, by extension, for the tobacco industry as a whole.