Altria Group, owner of the Philip Morris cigarette businesses in the U.S. and abroad, agreed Thursday to buy cigar maker John Middleton for $2.9 billion in cash, a deal that adds to the company's non-cigarette products in the U.S. market.
With domestic cigarette consumption steadily declining, Altria has looked for products to replace those losses. It has also started selling Marlboro-branded smokeless tobacco products in the Dallas/Fort Worth and Atlanta metropolitan areas.
"It fits squarely with our announced strategy to grow our U.S. tobacco business beyond cigarettes and complements our recent initiatives in the smokeless category," Philip Morris USA chief executive Michael Szymanczyk said in a statement. In the third quarter, domestic cigarette volume declined between 3 percent to 4 percent.
In the deal to buy John Middleton, maker of Black & Mild cigars, Altria Group Inc. said the purchase price includes about $700 million in tax benefits. Excluding those benefits, the acquisition is valued at $2.2 billion.
The company said it will finance the deal with existing cash. Altria is buying John Middleton from privately held Bradford Holdings.
The acquisition comes as Altria prepares to spin off its Philip Morris International division. The board is expected to announce the exact timing of the spinoff on Jan. 30. The split, analysts say, would free the international unit to more aggressively pursue sales in emerging markets without the legal and regulatory constraints the U.S. unit faces.
Deal to Close by End-Year
John Middleton makes large machine-made cigars. Volume for that segment of the cigar market for 2007 is estimated at 5.3 billion cigars, according to Altria. Altria estimated the growth rate for large machine-made cigars was 4 percent annually from 2003 to 2007.
The company said it expects John Middleton's revenue to reach $360 million in 2007 and operating income to hit about $183 million. Altria said it expects the deal to close by the end of the year. The acquisition should add to earnings next year.
John Middleton's headquarters are in King of Prussia, Pa.
Altria's break-up plans call for consolidating domestic cigarette production in Richmond, Va., and moving all international manufacturing to plants outside the U.S. Philip Morris International is based in Lausanne, Switzerland.
Besides the Philip Morris units, Altria owns a 29 percent stake in London-based SABMiller, which brews Miller Lite beer.
The spin off of Philip Morris International is the next step in a restructuring that started with the spin-off of its majority stake in Kraft Foods Inc. in March.
Altria, the parent company now based in New York, will move its headquarters to Richmond, where Philip Morris USA is located, and cut 400 jobs. It has also opened a research center in Richmond to develop new products to replace cigarettes.