[Intl-tobacco] Altria split still faces hurdles

[Robert Weissman]

http://www.businessweek.com/bwdaily/dnflash/dec2005/nf20051215_0993_db035.htm

Business Week

DECEMBER 15, 2005

NEWS ANALYSIS
By Nanette Byrnes


  For Altria, Too Soon to Celebrate?


        Its stock is soaring on the news of a big court victory. But it
        may not speed up the timetable for Philip Morris' planned split
        from its parent

Moments after the Illinois Supreme Court released its verdict in favor
of Philip Morris on the morning of Dec. 15, the stock of parent company
Altria (MO <javascript: void showTicker('MO')> ) began to trade wildly.
Within two minutes it had gained $4.42 and hit $78.15 a share, an
all-time high. The news that Altria wouldn't have to come up with $10
billion in punitive and compensatory damages was, of course, welcome in
and of itself to investors. But they're really betting that this will
clear the way for the company to pursue a breakup in 2006.

Such a split of its tobacco from its Kraft food operations, Wall Street
estimates, could result in a valuation of roughly $90 a share. Altria's
management has firmly committed to such a plan, most recently in a
November speech to investors by CEO Louis C. Camilleri.

With $11 to $12 a share of value still on the table, investors can't be
totally blamed for hopping into the shares with such glee. But before
joining in, there are a few reasons to be a bit more cautious.

LITIGATION LOOMING.  Most of the analysts covering Altria are betting
that the split up will occur in 2006. If that were to happen, and $90 is
the right number, they would be looking at a 15% return. But the
Illinois case is far from the only major litigation the cigarette maker
is staring down.

The Justice Dept.'s RICO case against the major tobacco companies is
currently being decided by Judge Gladys Kessler, and a loss could cost
the defendants $14 billion. With half the U.S. market, Philip Morris
would be facing a big bill.

The other big worry is Florida's Engle class action. Again, Philip
Morris is one of several defendants facing an even bigger judgment of
$145 billion in punitive damages. Though oral arguments were heard in
November, 2004, no decision has yet been rendered. In addition, the
plaintiffs in Illinois could also appeal the case to the Supreme Court.

SLOW BREAKUP.  Altria's board is unwilling to move forward on dividing
the company if major lawsuits remain outstanding. But the wheels of
justice grind slowly, and as Altria waits for a resolution in Florida
and Washington, D.C., new lawsuits are being brought on a regular basis
(61 were filed in 2005 alone). Some feel the most worrisome of these is
the Schwab case, which involves light cigarettes. It's being heard by a
New York judge with a track record unfavorable to the industry.

The fact that this case might delay a breakup until late 2007 or even
2008 was enough to cause Goldman Sachs analyst Judy E. Hong to downgrade
the stock on Nov. 16 from outperform to in line with the market. Hong
expected Altria to win in Illinois, but she argues that even beyond
victories in these most-watched cases, it has more to worry about in the
courts.

Altria executives have been arguing of late that their litigation risk
is sharply lower. In his November address Camilleri said Philip Morris
USA's case count had declined significantly, as had the number of cases
going to trial. The total number dismissed this year, he said, is 135.

ONLY ONE WIN.  Yet all it takes is one bad loss to turn the current
celebration somber. Don Yachtman bought heavily into the stock in 1999
for Yachtman Asset Mgmt. after the initial loss in the Engle case sent
shares down into the $20s. But he has sold most of that position in the
rise since, and he says declarations of victory are premature.

The Illinois case "was a long shot anyway," says Yachtman. "I wouldn't
overread it. In the kind of litigation environment we have in this
country, I wouldn't say anyone is out of the woods forever." In its most
recent annual report, Altria reported on 70 different pending lawsuits,
most of them tobacco-related.

Without a breakup in the near term, it's hard to see how a stock that
has climbed 27% over the past 12 months could make much of a move from
here. Putnam Investments got into the shares in 2003 and has enjoyed the
ride up, but Managing Director Bartlett Geer says Putnam isn't adding to
its position either. Though an $11 or $12 upside would be respectable in
the current market, Geer sees better opportunities elsewhere. "It's not
like you're getting the good news at the old price," says Geer. "You're
getting the good news at the new price."