Altria Ready to Consider Next Breakup: Tobacco

By VANESSA O'CONNELL

February 1, 2007; Page A8

Having set a March 30 date for the spinoff of its roughly 89% stake in Kraft Foods Inc., Altria Group Inc. is now expected to decide on the next phase of its restructuring: splitting its U.S. tobacco operations from its international business.

A board decision on the separation of the tobacco businesses is expected later this year, and in the eyes of many analysts, an official acknowledgment of the move by Altria could push Altria shares higher.

"There are clearly measures we can take going forward to enhance shareholder value," said Altria Chief Executive Louis Camilleri in an interview yesterday, noting a "conglomerate discount" has affected Altria shares.

Altria has been contemplating the two-stage breakup for several years. Separating the international and U.S. parts of Philip Morris makes sense because while both Philip Morris USA and Philip Morris International sell Marlboro cigarettes, they face differing regulatory landscapes and growth prospects.

If the companies do split, Mr. Camilleri wouldn't say what he personally would do. "The board will decide that," he said, noting that "I would hope to be associated with one of the components." Asked if he liked the weather in Switzerland, where PMI is based, Mr. Camilleri, 51 years old, said, "I lived in Switzerland for 20 years, so yes, I like it very much." Then he added: "But there are other countries I quite like as well."

Mr. Camilleri said that overseas, the biggest problem is a lack of "fair and equitable tax structures" in certain markets -- such as cigarette competitors in Germany that have enjoyed lower taxes and therefore lower prices. But he said lawsuits are less of a problem. "America is a litigious society. Luckily this country has been unable to export it."

Some disagree. Kathryn Mulvey, executive director of Corporate Accountability International, an antitobacco watchdog group, noted that as individual countries enact legislative and regulatory measures making it easier for the local smokers to sue, Philip Morris International could face more lawsuits.

The split "could allow Philip Morris USA to be shielded from any liabilities it faces internationally. That would be a big concern," Ms. Mulvey added.

As for regulatory pressures overseas, Mr. Camilleri said: "In most instances, we are very supportive of regulation. We share the belief that we need to reduce the harmful effects of smoking." Last year, PMI named a veteran pharmaceutical executive to head research and development.

In the U.S., Philip Morris has 50.3% of the cigarette market, a position that helps give it pricing power and high profits -- $4.8 billion in operating income last year. But the number of U.S. smokers declines steadily: Philip Morris USA's sales fell 1.1% to 183.4 billion cigarettes in 2006. Altria is lobbying to have Congress give the Food and Drug Administration oversight of tobacco, a move other cigarette companies would oppose. As for a move into pharmaceutical products, such as systems to deliver medicine into the lungs, Mr. Camilleri said, "I'm not going to go there." He said the focus would be on developing "lower-risk" products.

By contrast, Altria's international tobacco operations are still growing. Overall, Philip Morris International sold 831.4 billion cigarettes in 2006, up 3.4%, while operating income rose 8.1% to $8.5 billion. PMI has a licensing deal with China National Tobacco Corp. for Marlboro. Nearly two trillion cigarettes a year are consumed in China. "Our ambition is to become [CNTC's] No. 1 strategic partner, but that will take time," Mr. Camilleri said, acknowledging that Marlboro's market share is tiny. "Marlboro has significant brand equity in China," he added, "and we'll see how it develops over time ... Ultimately the market will open up."

Mr. Camilleri called this "the best litigation environment ever" for tobacco companies in the U.S. But it is possible the Kraft spinoff could be delayed if plaintiff lawyers seek to block it in court, arguing that it amounts to a move to shield corporate assets. Would Altria consider settling any lawsuits that might come up? "Never," Mr. Camilleri said.

As for Altria's custodianship of Kraft, he said, "I think the company brought a lot to Kraft in terms of a discipline and control environment that didn't exist at the time." He acknowledged that because of problems such as rising commodities prices, the past few years had represented "hard times." He said that Kraft, by embracing certain restrictions on unhealthy food for children, had taken a "leadership role in the industry" and "learned from our experience" even when it hurt the bottom line, such as when Kraft declined to advertise kids' cereal to young children on TV, while some of its competitors persisted.

Write to Vanessa O'Connell at vanessa.oconnell@wsj.com23

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TOBACCO CASES

Some recent major developments in lawsuits against the tobacco industry.

Watson case: The Supreme Court accepted a plea16 from Arkansas plaintiffs upset about the court venue for their tobacco lawsuit against Philip Morris, alleging the company violated state laws with deceptive marketing of its "light" cigarette brands. (January 2007)

Price case: The Supreme Court refused to consider reinstating17 a $10.1 billion penalty against Philip Morris resulting from a class-action lawsuit claiming consumer fraud over "light" cigarettes. The Illinois Supreme Court threw out the award in 2005. (November 2006)

Schwab case: A U.S. appeals court issued a formal stay18 in the class-action suit. In September, a federal judge granted class-action status19 to tens of millions of "light" cigarette smokers for a potential $200 billion lawsuit against tobacco companies. (November 2006)

U.S. Justice Dept. case: A federal judge overseeing the government's landmark lawsuit against the tobacco industry ruled tobacco companies violated20 federal racketeering laws. But the judge said she didn't have the authority to order major financial remedies. (August 2006)

Engle case: The Florida Supreme Court upheld a lower-court decision21 tossing out a $145 billion award against tobacco companies, saying the award -- the largest punitive-damages award ever -- was "excessive as a matter of law." (July 2006)

Williams case: The U.S. Supreme Court will review22 a $79.5 million award won by the widow of a former smoker against Philip Morris. (May 2006)

February 5, 2007

Altria Holders May Bet Against Future Kraft Shares

By MOHAMMED HADI

February 5, 2007; Page C6

It isn't often that investors hedge positions they don't yet own, but that is exactly what some are advising Altria Group Inc. shareholders to consider.

The hedge is on shares of Kraft Foods Inc. that Altria shareholders are about to receive. Altria will spin off its stake in Kraft next month, giving investors 0.7 share of Kraft for every Altria share they hold.

Excitement about the move, which was announced last week, has helped lift Altria's shares about 13% since the third quarter, as the company overcame barriers to the spinoff.

Shares of Kraft, on the other hand, have lost nearly 5% in the four months as the company has faced competition and cost pressures.

So it is understandable that Altria shareholders might not be that interested in keeping the shares of Kraft they are due to receive, and that has some expecting that a flood of stock for sale will cause a notable decline in Kraft's share price. "More than $50 billion of Kraft equity needing to find a home all at once will likely cause an extended oversupply of the shares," D.A. Davidson analyst Timothy Ramey said in a recent note.

Investors worried about this should "go out and buy puts even though they don't own the stock yet," said Joseph Palazzola, options strategist at A.G. Edwards & Sons.

By doing so, investors can lock in Kraft's current $34.03 share price -- less the cost of the puts, of course.

Now might be a good time to do this because of other stock-moving events expected ahead of the spinoff. Later this month, for example, Kraft is expected to outline its plans at a conference of the Consumer Analyst Group of New York, an event that many research analysts are awaiting cautiously.

There was some trading in puts on Kraft on Friday, with about 2,200 contracts changing hands. Trading Friday was heaviest in the June 27.50 puts. About 900 of these changed hands, compared with 750 outstanding, and they slipped five cents to 20 cents.

Write to Mohammed Hadi at mohammed.hadi@dowjones.com1

URL for this article: http://online.wsj.com/article/SB117063373166897741.html

QUESTIONS:

1.) Refer to the feature article as well as the article titled, "Altria: Cereal to Cigarettes." Describe the units of Altria.

2.) What is a spinoff? What is the motivation for a spinoff?

3.) Refer to the feature article and the related article by Bary. What are the terms of the Kraft spin-off? What percentage of Kraft does Altria currently own? What will shareholders of Altria receive as a result of the spinoff?

4.) What is the difference between a spinoff, an equity carve-out, and an asset sale? Be specific.

5.) What is Altria considering with respect to its tobacco operations?

6.) Refer to the related article by Bary. Once the restructuring is complete (including the Kraft spin-off and the split of Philip Morris), what is the expected combined stock price of all entities for 2008 according to David Adelman, tobacco analyst at Morgan Stanley? How does this compare to the current price of Altria? Why might this price differential occur?

7.) Refer to the related article by Hadi. Why might Altria shareholders be uninterested in receiving Kraft shares?