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Altria to acquire cigar maker John Middleton

Boston Red Sox's relief pitcher Jonathan Papelbon puffs on a cigar in Boston, Massachusetts, October 30, 2007. Altria Group said on Thursday it would acquire cigar maker John Middleton Inc for $2.9 billion. REUTERS/Steven Senne/Pool (UNITED STATES)

CHICAGO (Reuters) - Altria Group Inc MO.N said on Thursday it would acquire cigar maker John Middleton Inc for $2.9 billion, breaking into the growing U.S. cigar business as it tries to expand beyond the shrinking U.S. cigarette market.

The net cost of the acquisition of Middleton, maker of Black & Mild cigars, from privately held Bradford Holdings is $2.2 billion after deducting $700 million in tax benefits arising from the deal, Altria said.

The deal is expected to close by the end of the year and add modestly to Altria’s 2008 earnings, the company said.

The deal comes as Altria is planning to split up its Philip Morris USA and Philip Morris International businesses. Philip Morris USA, maker of the industry leading Marlboro cigarette, has already been test-marketing different forms of smokeless tobacco as it looks for growth areas.

U.S. cigarette consumption has declined steadily since 1981 as more bans on smoking in public places are put in place, health messages against cigarettes become more prevalent, and cigarette makers face marketing limitations from the 1998 tobacco litigation settlement with the states.

Meanwhile, the market for machine-made cigars, where Middleton participates, has increased at a compound annual rate of about 4 percent from 2003 to 2007, Altria said.

Middleton’s operating revenue is projected to be $360 million in 2007, generating operating income of $182 million. From 2003 to 2007, operating revenue has grown at a 10 percent compound annual rate, while operating income is up at a 13 percent rate, Altria said.

Altria shares closed Wednesday at $72.93 on the New York Stock Exchange. The stock trades at about 15.7 times estimated 2008 earnings, compared with an average multiple of 15.50 for the Dow Jones U.S. tobacco index .DJUSTB.