Altria Seen Nearing Tobacco Spinoff


Altria Group is widely expected to announce plans for the spinoff of its Philip Morris International unit this week, but some analysts see limited gains for a stock that already looks more expensive than its peers.

"We now believe the near-term trading upside potential may be modest (up a few percentage points) and instead see the stock gradually rising towards our price target of $79 over the next 12 months," Judy Hong, analyst at Goldman Sachs, said in a research note.

Altria -- which owns Marlboro cigarette makers Philip Morris USA and Phillip Morris International, as well as a stake in brewer SABMiller Plc -- traded at about 15 times estimated 2008 earnings as of Friday, compared with a multiple of 14.8 percent for the Dow Jones U.S. tobacco index.

The stock was up $1.36, or 2 percent, at $70.55 Monday afternoon in anticipation of Wednesday's board meeting, where analysts expect the company will either announce plans for the spinoff of PMI, a large share buyback or both.

"I think they'll be releveraging their balance sheets at both companies and buying back upward of $35 billion of stock combined," said Charles Norton, portfolio manager of the Vice Fund, which held 136,500 Altria shares as of July 31. Norton expects a spinoff and then large share repurchases at both companies.


An Altria spokeswoman declined to say whether the board would discuss a Philip Morris International spinoff at the meeting.

The Crown Jewel

The company had said in the past that it was considering the possibility of a spinoff of the international business, following the March spinoff of its Kraft Foods stake.

The international business is seen as having better growth opportunities, especially in emerging markets, than the U.S., where cigarette consumption has been steadily declining since 1981.

"Between the two, the international unit is the crown jewel," Norton said, "There's just much more growth there."

Philip Morris USA, which has more than 50 percent of the U.S. cigarette market, is also experimenting in the faster-growing smokeless tobacco business. The company said last week that it would start selling Marlboro smokeless tobacco in Atlanta as a market test.

Despite a shrinking cigarette market, Philip Morris USA still generates a lot of cash, which could be used to help the international business expand, said Gregg Warren, analyst at Morningstar.

Because of that, Altria might decide to sell only a portion of the international business to the public, as it initially did with Kraft in 2001, he said.

Warren has a fair value of $78 on Altria's shares stock, so he also does not see a great deal of appreciation should Philip Morris International be spun off.

But Bonnie Herzog, analyst at Citigroup Investment research, has an $84 price target on Altria and said there is only "nominal downside" risk.

"We anticipate Altria shareholders will receive PMI shares within four to six months after the board approves the transaction," Herzog said in a research note, adding that she saw an 80 to 90 percent chance the board would announce a tax-free spinoff of the unit on Wednesday.

"We firmly believe that as soon as Altria issues a press release stating that it will be spinning off PMI to shareholders in a tax-free spin and possibly providing details surrounding the transaction, the stock should move up quickly," Herzog said in a research note.

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