CHICAGO Altria Group Inc (MO.N) is splitting the Marlboro cigarette business apart, saying Wednesday that it will spin off its Philip Morris International unit in move seen as unlocking the value of that faster growing business.
The spin-off is the second in a corporate restructuring that saw Altria spin off its Kraft Foods Inc KFT.N holdings in March. Details on the timing of the latest spin-off will be announced in January.
The company also raised its quarterly dividend on Wednesday by 8.7 percent to 75 cents per share.
Altria shares rose 59 cents at $69.66 in afternoon trading on the New York Stock Exchange following the much-anticipated news. The shares had traded as high as $70.98 before the announcement.
The Philip Morris International business is seen as having better growth opportunities, especially in emerging markets, than the Philip Morris USA business. U.S. cigarette consumption has fallen steadily since 1981.
"We view PM USA as a declining cash cow, and PMI as an attractive growth vehicle through (mergers and acquisitions) and expanding market share," Craig Hutson, senior investment analyst at corporate bond research firm Gimme Credit, said.
Yet both businesses are strong cash generators. PMI had operating cash flow of about $6.2 billion in 2006, while what will remain of Altria had $3.7 billion in cash flow, Louis Camilleri, Altria Group's chairman, said.
Both companies should be able to enact share repurchase plans, he said, adding that the timing and magnitude would be announced later.
Altria also plans to tender for its $4 billion in outstanding debt and refinance it before the spin-off, he said.
The company is pursuing the spin-off, in part, to improve each unit's focus on its specific market dynamics, have more financial flexibility and eliminate whatever "sum-of-the-parts" discount still hangs over Altria's stock, which typically trades as if it were only a U.S. tobacco company, Camilleri said.
"I've yet to hear a compelling argument to keep the status quo," he said.
When the spin-off is completed, Altria expects that Philip Morris USA Chairman and Chief Executive Michael Szymanczyk will be appointed chairman and CEO of Altria Group, and Camilleri will assume that role at Philip Morris International Inc.
PMI's stock will have its primary listing on the New York Stock Exchange, Camilleri said.
The spin-off should save $250 million in corporate costs between the two companies, including the closure of Altria's corporate headquarters near Grand Central Station in Manhattan, he said. About two-thirds of the 600 employees at headquarters would lose their jobs, he said.
EXPERIMENTING WITH SMOKELESS
With the U.S. cigarette market declining, Philip Morris USA has been experimenting in the smokeless tobacco market. Last week the company said it will test market Marlboro smokeless tobacco in Atlanta.
Much of the U.S. company's growth will likely come from this "adjacency" strategy of moving into new products, Camilleri said.
Altria's top U.S. competitor, Reynolds American Inc (RAI.N), bought the Conwood smokeless tobacco company in 2006 to tap into the growing smokeless tobacco market.
Some analysts have speculated that Altria could eventually buy top U.S. smokeless tobacco maker UST Inc (UST.N).
Altria will also keep its 28.6 percent stake in beer maker SABMiller Plc (SAB.L).
Altria has just over half of the U.S. cigarette market, but only about 15 percent of the international market, leaving PMI plenty of room to grow.
"There is still a considerable amount of growth in cigarettes," Camilleri said.
Credit rating agency Standard & Poor's Rating Services revised its outlook on Altria to "stable" from "positive" following the announcement, and affirmed its "BBB-plus" rating on Altria's long-term debt.
The agency also said Philip Morris International's credit rating could be as high as "A-plus," though the ultimate capital structure and financial policies of PMI are not yet known.
The spin-off will be subject to the receipt of a favorable ruling from the Internal Revenue Service, as well as other factors. (See here for "Shop Talk" -- Reuters' retail and consumer blog)