[Intl-tobacco] Will Philip Morris Intl Be Spun Off?

[robert weissman]

Barron's Online

MONDAY, OCTOBER 24, 2005
Altria Breakup Looks Likelier

ALTRIA MOVED CLOSER TO A BREAKUP, with the U.S. Supreme Court's recent
decision to let stand a federal appeals court decision nixing the
enormous $280 billion penalty sought by the federal government in its
lawsuit against the tobacco industry.
[chart]

Wall Street now awaits two other important legal decisions, involving
the Engle class-action suit in Florida and the Miles/Price case in
Illinois. If those rulings, expected by year-end, go in favor of the
industry, Altria (ticker: MO), the parent of Philip Morris, could
announce by early next year that it is splitting into three. Altria
wants its legal liabilities cut markedly before a potential separation,
so its foes can't claim that it is fraudulently transferring valuable
assets to shareholders. Barron's has written favorably of Altria twice
in the past 2=BD years.

An Altria breakup could mean further appreciation in the
Marlboro-maker's shares, up 20% this year, to 73, just below the recent
record of 75. Speaking of a breakup, David Adelman, the tobacco analyst
at Morgan Stanley, says: "It's a question of when, not if."

Adelman thinks Altria could top 100 in 2007 if it is broken up in 2006.
His view is that the first step in the breakup, announcement of a
distribution of Altria's 86% Kraft Foods (KFT) stake to shareholders,
could come by the end of 2005, if the Engle and Miles/Price appeals end
favorably. The Kraft stake is now worth about $41 billion -- nearly $20
per Altria share. Adelman and other analysts believe the tobacco firms
will win both cases.

The Kraft move likely would be followed by the separation of Altria's
powerhouse overseas tobacco arm, Philip Morris International, which
would emerge as the world's largest, most profitable cigarette outfit.
That would leave Altria with a domestic tobacco unit and 29% of brewer
SAB/Miller.

Altria last week reported that, in the third quarter, earnings from
continuing operations rose 7.8%, to $1.38 a share, despite weakness at
Kraft. Altria sees net of $5.05 to $5.10 a share for 2005 and analysts
expect about $5.50 for 2006.

Some investors may view Altria as fully valued, now that it's trading
close to a market multiple after long sporting a discount to the S&P
500, which fetches 15 times projected 2005 operating earnings.

A bullish Adelman says Altria's break-up is likely to involve not only a
separation into three parts but a steep increase in debt at both Philip
Morris International and the new Altria.

Excluding Kraft, Altria now has net debt of $5 billion, not much for a
company with $14 billion of projected 2006 pre-tax cash flow. Adelman
says the two tobacco parts of Altria ultimately could carry $35 billion
of debt, likely from large share buybacks and acquisitions. Altria
hasn't repurchased stock since early 2003.

Altria arguably is the best-positioned tobacco company in the world,
thanks to its size and the global strength of the Marlboro brand,
popular with younger smokers. With Altria's legal risk receding and a
breakup looking more likely, the shares still have may room to rise.

-- Andrew Bary

Box: What Altria's Worth
Morgan Stanley analyst David Adelman says Altria could top 100 in 2007,
30 points above its current level, if the company is broken up into
three parts.
=09Value
Asset =09Per Share
Philip Morris Intl =09$58
Philip Morris USA =0922
Kraft =0919
SAB Miller =095
Total: =09104
Source: Morgan Stanley