The Wall Street Journal-20080131-Altria Clears Spinoff of Philip Morris International

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Altria Clears Spinoff of Philip Morris International

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Altria Group Inc.'s board gave the final go-ahead to a split of its Philip Morris International tobacco business from Philip Morris USA and said the two new companies would buy back a total of $20.5 billion in stock over the next two years.

New York-based Altria made the announcement as it reported fourth- quarter and full-year results, which underlined the different growth trajectories that the U.S. and international tobacco businesses are following. While Philip Morris USA suffered a 4.6% slip in cigarette- shipment volume in 2007, Philip Morris International's cigarette volume for the year increased 2.2% amid the purchase of Lakson in Pakistan and other acquisitions.

Overall, Altria's fourth-quarter net income fell 26%, mostly because of the absence of Kraft, which was spun out last year.

The long-anticipated split of Philip Morris's international and U.S. tobacco operations will allow investors to choose from a pure play in the faster-growing international tobacco business, or the remaining Altria domestic tobacco business at a time when U.S. cigarette sales have been slipping.

Shareholders in Altria will get one share in PMI for each share they own in Altria. The split will be effective March 28. PMI, which will be listed on the New York Stock Exchange under the symbol PM, will buy back about $13 billion of shares over the next two years.

Altria, which plans to move its headquarters to Richmond, Va., will consist of the company's domestic tobacco businesses and a 28.6% stake in United Kingdom-based brewer SABMiller PLC. Altria plans to undertake a buyback of roughly $7 billion over the next couple of years.

Investors had anticipated the buybacks but had hoped for a slightly larger amount. But Altria Chief Executive Louis Camilleri said the smaller buybacks allowed the companies more "financial flexibility," especially given current uncertainty in the credit markets.

Ahead of the split, executives from each of the two sides are making plans to market the soon-to-be separate companies to investors at a presentation on March 11 in New York.

Mr. Camilleri, who, as previously announced, is quitting Altria to run PMI, said PMI is projecting a robust earnings performance, thanks partly to continued favorable currency-exchange rates. But he also noted it would face flat or slightly declining sales volume, as cigarette consumption slows in some large markets outside the U.S.

"Our ambition is that over time we can get to 1% to 2%" annual growth in cigarette volume, Mr. Camilleri said, adding that "as the years unfold," PMI can boost its market share in more markets, "which would translate into greater volume growth."

He noted that one of PMI's immediate goals is to begin production of Marlboro cigarettes under license in China, part of a 2005 deal in which Philip Morris agreed to market Chinese brands internationally in exchange for the right to produce its own Marlboro brand at state- owned factories. At the moment, Philip Morris is limited to importing its cigarettes for sale in China and is restricted by stringent quotas, but Mr. Camilleri noted that PMI would begin producing Marlboro in China within the next six months. The production of Marlboro in China wouldn't be subject to any quotas, he said.

Asked on a conference call what he would miss least about the U.S. tobacco business, Mr. Camilleri quickly replied: "the lawyers." He said the U.S. tobacco unit fared "remarkably well" in 2007 despite an increase in the rate of decline of cigarette consumption in the U.S. Excluding PMI, he said, Altria is projecting "solid" operating performance for 2008 but would face some "head winds" that would slow its growth, including a tax rate close to one percentage point higher, and higher overhead costs as it continues its push into the smokeless tobacco market.

Five Altria board members will leave to join PMI's board -- Harold Brown, Mathis Cabiallavetta, J. Dudley Fishburn, Lucio A. Noto and Stephen M. Wolf. In addition, Fiat SpA CEO Sergio Marchionne and Mexican billionaire Carlos Slim Helu will join the PMI board after the spinoff. Graham Mackay, CEO of SABMiller, has agreed to join the board later this year.

Altria will get several new directors, including Dominion Resources Inc. Chairman and CEO Thomas F. Farrell II and former Virginia Gov. Gerald L. Baliles.

Centerview Partners LLC and Lehman Brothers Holdings Inc. served as advisers on the spinoff.

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Andrew Edwards contributed to this article.