NEW YORK-- The board of the Altria Group, the parent company of Philip Morris USA and Philip Morris International (PMI), will meeting on Wednesday to decide whether to spin off the international arm of its cigarette business as part of a restructuring plan to increase shareholder value, according to The New York Times, citing people with knowledge of the discussions.
The U.S. business has hindered the stock price because of fears of more litigation, threats of government intervention and declining cigarette sales in the United States, analysts said.
Altria officials declined to comment to the newspaper about the potential spinoff of PMI. But several Wall Street analysts who cover the company said they believed it was inevitable.
This is something that has been in the works for years, Bonnie Herzog, an analyst at Citigroup, told the paper. To me, it's a done deal.
By splitting the two companies, PMI could expand more aggressively abroad, either through innovation or acquisition, the report said. PM USA, meanwhile, would focus on expanding into other tobacco productssuch as the recent introduction of Marlboro smokeless tobaccoand making its own acquisitions, probably other tobacco companies.
It allows PMI to become much more free to pursue growth opportunities, Herzog added. Altria Group would probably remain as a holding company for PM USA and the company's 29% stake in SABMiller, the beer company, she said.
Marc Greenberg, an analyst at Deutsche Bank Securities, told the paper that spinning off the international business would allow shareholders finally to benefit from the company's robust balance sheet. For instance, he said the company has not repurchased Altria stock in about four years because it was holding back money for such things as litigation risk and legal constraints. Longer term, it will provide more financial flexibility, he said of the spinoff.
The demand for cigarettes in the United States is in a gradual decline of about 1% or 2% a year. Philip Morris USA controls 51 percent of the American cigarette market and generates $18 billion in net revenue. To compensate for the declining smoking market, the company is trying to extend its brand names to new products, the report said.
For instance, it is now testing a Marlboro smokeless tobacco product, and it also is testing Marlboro snus, which are tobacco packets placed between the cheek and gum that do not generate spit like smokeless tobacco. Snus are geared more toward smokers than aficionados of chewing tobacco.
As part of an effort to ramp up its innovation pipeline, PM USA plans to unveil a $350 million research center in Richmond, Va., that will focus, in part, in developing reduced harm tobacco products.
In my opinion, technology will play an incredible role in this industry, particularly reduced risk, Herzog said.
Outside the United States, the demand for cigarettes is relatively flat, said the New York Times. Still, PMI has much more room for growth because it has only about 15% of the international market. PMI generated $48 billion in net revenue last year, the report said.
Altria's chairman and CEO, Louis C. Camilleri, has said for several years that he wants to restructure the company as soon as the litigation environment surrounding tobacco settles down, according to the report. Last October, citing an improvement, Altria's board announced that it would spin off Kraft Foods as a first step.
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