U.S. News

Kraft Spinoff Likely to Be Challenged By Smokers Attorney

By Christina Cheddar Berk

Altria Group's plan to spin off its Kraft Foods unit is likely to be challenged by at least one plaintiff's attorney representing smokers, which could delay and complicate the transaction.

Altria is expected to announce on Wednesday its long-awaited plan to spin off its 88.6% stake in Kraft , which went public in 2001. The Kraft spinoff is seen as the first step in a broader restructuring of Altria that could eventually lead to the separation of the company’s international and domestic tobacco businesses.

But at least one plaintiff's attorney is likely to oppose the spinoff, seeing it as a way for Altria to put valuable assets out of the reach of smokers with legal claims against the company.

"At this point, we feel fairly confident that a court would be receptive to a request for an injunction of the spinoff based upon our research and Altria's prior statements and conduct," said Michael Hausfeld, an attorney at Cohen Milstein Hausfeld & Toll in Washington, D.C.

Hausfield is part of a nationwide class-action lawsuit against major manufacturers of so-called "light" cigarettes. The suit contends that tobacco companies misled smokers into believing light cigarettes were somehow safer.

Hausfeld and the other plaintiff's attorneys plan on studying next week's announcement closely. He said he will "most likely" take action to block the spinoff.

Could Hurt Shares

Even if an attempt to win an injunction fails, the legal manuevering could force Altria to postpone the spinoff, which would likely hurt both Altria and Kraft shares in the short term. Altria shares have risen in recent month on expectations of a Kraft spinoff.

Next week's announcement is expected to outline the details of the spinoff, including the record and distribution dates of the transaction. Altria shareholders are likely to receive about 0.695 Kraft shares for every Altria share they own.

Since the maximum number of days allowed between the announcement and distribution date is 120 days, Altria is likely to try to complete the deal by the end of April.

Bonnie Herzog, a tobacco industry analyst at Citigroup, said there is a chance that an injunction could be filed. However, she expects Altria will prevail.

"Worst Case Scenario"

“In a worst-case scenario, if Altria is unable to fulfill its transaction within the 120 days due to a potential injunction, we certainly expect the company to announce the transaction all over again,” Herzog said. Herzog doesn’t own shares of Altria, but Citigroup has an investment banking relationship with the company and owns at least 1% of Altria’s outstanding stock.  

Kraft shareholders have been in limbo for a while, and a delay in the spinoff will make things even more difficult.

Kraft, the maker of Oreo cookies, DiGiornio pizza and Oscar Mayer meats, has been struggling to fend off competition from private-label products and rising commodity prices. As an independent company, Kraft will likely be able to act more nimbly to respond to the challenges it faces, and be more aggressive in reshaping its portfolio.

Most recently, Kraft announced the sale of its Cream of Wheat hot cereal business. This one of several assets Kraft has sold in recent years. Kraft also might be in a better position to make acquisitions, potentially even using its stock as currency.