Altria May Separate Kraft and Philip Morris

Altria Group Inc., the owner of cigarette maker Philip Morris and Kraft Foods Inc., may separate into two or three units after tobacco litigation dragged down the stock. Shares of Altria had their biggest gain in more than a year.“Looking at Altria’s price to earnings multiple excluding Kraft, you can see that our tobacco businesses are significantly undervalued versus their tobacco peers,” the chief executive officer of New York-based Altria, Louis Camilleri, told investors at a Morgan Stanley conference.Altria, which owns the world’s largest cigarette maker, faces three major lawsuits that have pushed its stock down 14% from a record high in March. Spinning off Kraft would remove the litigation taint from the no. 1 foodmaker, whose declining profit for five straight quarters has hurt Altria’s earnings.“Unfortunately Philip Morris USA has drowned out all the rest of the company’s assets,” said David Dreman, who manages more than $11 billion, including 16.5 million Altria shares as of June 30. “By spinning it off they’ll put a much higher price on their other assets. It’s a classic case of the sum of the parts is worth more than the whole.”Shares of Altria rose $4.23, or 8.5%, to $54.23 at 4:02 p.m. in New York Stock Exchange composite trading.“The company trades at a terrible discount to its intrinsic value,” said Thomas Russo, who helps oversee more than $2 billion at Lancaster, Pa.-based Gardner, Russo & Gardner, including 3 million shares of Altria.The company’s tobacco operations trade at seven times income compared to rival companies that trade at 12 times earnings, Mr. Russo said.Altria shares are worth $75 to $80 if the company were separated into Kraft, Philip Morris USA and Philip Morris International, Goldman Sachs analyst Judy Hong wrote in a note yesterday. The New York analyst rates Altria as “in-line.”Mr. Camilleri’s comment “confirms our view that the company is likely to fully spin off Kraft and separate U.S. and international tobacco operations,” Ms. Hong wrote.Splitting off Philip Morris International would allow it to trade at higher multiples to earnings, analysts said. Merrill Lynch analyst Martin Feldman said in a research note that the international unit is being valued at 5.2 times his 2005 estimate for earnings before income, taxes, depreciation, and amortization, compared with 7 times for British American Tobacco Plc.Before yesterday, Altria shares had fallen 8.9% since Mr. Camilleri became chief executive in April 2002. Mr. Camilleri was chief financial officer in 2001 when the company sold about 16% of Kraft, the maker of Oreo cookies and Ritz crackers, in an initial public offering.Altria now owns almost 85% of Kraft, worth about $50 billion at current prices, or about 45% of the company’s market value.Philip Morris and other cigarette makers are defendants in cases in Florida, Illinois and Washington. The Florida’s Supreme Court heard the tobacco industry’s argument yesterday against a $145 billion punitive damage award.On Wednesday, the Illinois Supreme Court will hear arguments on a $10.1 billion verdict against the company for misleading smokers.In a trial that started in September, the U.S. Department of Justice alleges the tobacco industry deceived the public and policy makers about the hazards of cigarettes and seeks to force the cigarette makers to forfeit $280 billion in revenue.Today’s comments mark the first time Mr. Camilleri, 49, has stated he may spin off units, company spokesman Timothy Kellogg said. He has made more general comments referring to splitting up the company for a couple of years, Mr. Dreman said.Altria’s third-quarter profit climbed 6.3% to $2.65 billion, boosted by sales of Marlboro cigarettes and investment income.Philip Morris USA boosted Marlboro shipments for a fourth straight quarter as the unit’s profit remained unchanged at $1.15 billion. International tobacco profit climbed 7% to $1.8 billion, helped by the American weaker dollar and higher shipments in 15 regions including Belgium muting declines in France, Germany, and Italy.Altria’s profit from Kraft dropped 11% to $1.3 billion, reflecting $45 million in charges for closing factories and firing workers.In 1999, RJR Nabisco Holdings Corp., the maker of Winston and Camel cigarettes, sold off its international tobacco operations for $8 billion to Japan Tobacco Inc. and spun off its American tobacco unit as R.J. Reynolds Tobacco Holdings Inc. It renamed the remaining company Nabisco Holdings Group.Altria bought Nabisco in 2000 and R.J. Reynolds Tobacco in July acquired Brown & Williamson Tobacco Corp. and renamed itself Reynolds American Inc.

Altria May Separate Kraft and Philip Morris

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