Altria Group , the parent of cigarette maker Philip Morris USA, plans to spin off its majority stake in Kraft Foods on March 30.
Altria shareholders see the long-awaited spinoff as the first step in a broader corporate restructuring that could eventually separate Altria's domestic and international tobacco businesses.
The announcement comes as Altria reported fourth-quarter profit rose 29%, helped by the strength of sales of Marlboro and Parliment cigarettes. Earnings for Kraft fell 19%, hurt by charges to restructure its operations and write offs related its Tassimo coffee and Cream of Wheat cereal businesses.
Crafting A More Nimble Business
Kraft, the world's second largest food company behind Nestle, has been struggling to compete in an increasingly competitive environment. The spinoff is expected to make Kraft more nimble.
Altria said it expects it to improve Kraft's ability to make acquisitions, allow the management of both companies to improve their focus on their businesses, provide greater debt capacity for each, and permit both companies to target their respective shareholder bases more effectively.
"I believe that an independent Kraft will enjoy enhanced flexibility to grow its business and be in a substantially stronger position to create enduring shareholder value," said Louis C. Camilleri, Altria Chairman and Chief Executive Officer, in a written statement.
Under the plan, Altria will distribute its 89% stake in Kraft to Altria shareholders of record on March 16. Altria shareholders will receive 0.7 share of Kraft for every Altria share they own.
The timing of the spinoff is earlier than some industry analysts had expected and means new Kraft Chief Executive Irene Rosenfeld will need to move quickly to communicate her strategy for the food business to investors. Kraft intends to unveil its business plan and goals for 2007 on Feb. 20 at an industry conference.
Camilleri To Resign As Kraft Chairman
As a result of the planned spinoff, Camilleri will be stepping down from his role as chairman of Kraft at the end of March, but he will remain on the board.
Irene Rosenfeld, who was named Kraft's chief executive last year, will take on the additional post of chairman of the Northfield, Ill., food company.
Two Altria executives - Chief Financial Officer Dinyar Devitre and General Counsel Charles Wall - also will resign from the Kraft board.
Altria doesn't plan to own any Kraft shares after the spinoff, and will convert its Class B shares of Kraft stock into Class A shares, before the distribution.
During a conference call with investors, Camilleri said he intends on remaining a "big" Kraft shareholder.
"I don't intend on selling my shares," he said.
Altria said no governmental or Internal Revenue Service ruling is necessary to move ahead with the plan. The spinoff will be tax-free for shareholders, except for those receiving cash in lieu of fractional shares for amounts less than one Kraft share.
Altria plans to adjust its dividend so shareholders who retain their Kraft shares will receive, in the aggregate, the same dividend they received before the deal. The exact distribution ratio will be determined on the record date, the company said.
"The board's recent announcement is just as we expected, which is positive," said Bonnie Herzog, a tobacco industry analyst at Citigroup. "Now, investors must wait to see if an injuction is filed in an attempt to block the spin."
Herzog, who doesn't own Altria shares, expects the company will be able to defend against any legal challenges. Citigroup has an investment banking relationship with Altria.
Risk Of Injunction
Altria had put the spinoff of Kraft on hold until it felt there was enough clarity in the U.S. tobacco litigation environment to proceed, but a series of recent legal victories in large class-action cigarette cases has given it confidence to proceed.
One concern had been that if Altria went ahead with its plan, a smoker with claims against the company would seek to block the spinoff by claiming Altria was attempting to put valuable assets out of reach of smokers with legal claims against it.
On Wednesday, Camilleri said Altria has no intentions of settling with any plaintiffs that might attempt to challenge the spinoff.
"If a challenge were to arise, I don't think the challenge would have any merit," he said. "I think we would prevail."
Still, such a move could cause volatility in the trading of Kraft and Altria shares.
The spinoff, which will bring 1.5 billion more Kraft shares to market, will put pressure on Kraft's stock price as some Altria shareholders move to sell the Kraft stock that they do not wish to keep.
Longer term, the details of Rosenfeld's plans will be key.
"While today's announcement clears the way for Kraft to be run as a completely independent entity, making it easier to use shares or debt for M&A, we also see further dilutive divestitures and significantly higher marketing spending as likely," said David Driscoll, a food industry analyst at Citigroup.
Driscoll expects Kraft to to show "little or no" per-share earnings growth from 2006 to 2007.
As for Altria investors, many are already looking ahead to the company's next move. Many expect a spinoff of Philip Morris International to push Altria shares higher.
During the conference call, Camilleri declined to discuss whether the Kraft spinoff would be followed by a separate of its domestic and international tobacco businesses.
"I don't intend to field such questions today," Camilleri said. "Our strategy is well-defined....For now, our sole focus is to ensure the successful...spin off of Kraft."