[Intl-tobacco] Philip Morris/Kraft/PMI spinoff update

[robert weissman]

http://www.bloomberg.com/apps/news?pid=20601103&sid=auczYmMlN4XU

Altria Net Falls; Decision on Kraft Due in January (Update5)

By Chris Burritt

Oct. 25 (Bloomberg) -- Altria Group Inc., the world's largest tobacco
company, reported an unexpected drop in third- quarter profit as
shipments fell in Europe and Japan, and said it will decide in January
when to spin off Kraft Foods Inc.

Altria shares rose after Chief Executive Louis Camilleri set the first
timetable for his two-year-old plan to separate Philip Morris, the maker
of top-selling Marlboro cigarettes, from Kraft, the world's
second-biggest food maker. Camilleri said the company is also
considering splitting its U.S. and international tobacco units.

Investors were ``looking for an affirmation of Altria's commitment to
restructure,'' said Thomas Russo, who manages more than $3 billion at
Lancaster, Pennsylvania-based Gardner Russo & Gardner, including 4.1
million Altria shares as of June 30.

Shares of Altria rose $2.25, or 2.8 percent, to $82.07 at 3:25 p.m. in
New York Stock Exchange composite trading. The stock through yesterday
was down 6.1 percent from a record high of $85 on Aug. 28, after a legal
ruling in September that investors said delay a breakup of the company.
Kraft rose 9 cents to $35.45.

Altria's net income dropped to $2.875 billion, or $1.36 a share, from
$2.883 billion, or $1.38, a year earlier, the New York-based company
said in a statement today. The decline is the first in seven quarters,
led by a drop in international sales, which account for 49 percent of
Altria's revenue.

Sales rose 3.7 percent to $25.9 billion. European Union shipments fell
0.9 percent.

Costs for factory closings and job cuts in Kraft's three- year
restructuring were $139 million higher in the third quarter than a year
earlier.

Reynolds American

Reynolds American Inc., Altria's biggest competitor, said today its net
income climbed 45 percent, more than analysts estimated, on higher sales
of its Kool and Camel cigarettes.

Net income climbed to $309 million, or $1.05 a share. Revenue grew 1.9
percent to $2.19 billion, Winston-Salem, North Carolina-based Reynolds
said today in a statement.

Chief Executive Officer Susan Ivey increased top-selling Camel and
Kool's share of U.S. cigarette sales during the quarter. She also
expanded beyond the declining cigarette market with the purchase of
snuff maker Conwood and cut costs by closing a Georgia plant and firing
workers.

Spinoff Decision

Altria's board will meet in January to decide on the timing of the Kraft
spinoff. Separating Kraft, the world's second- largest food company,
will distance it from the threat of tobacco lawsuits against Altria. The
food and tobacco companies will probably repurchase shares once they're
operating independently, Altria Chief Executive Officer Louis Camilleri
told analysts last year.

``Management is showing its impatience to get the Kraft spin done,''
said Charles Norton, who oversees $175 million including Altria shares
as a principal of GNI Capital Inc. in Addison, Texas.

Kraft would be separated before the company considers steps to split up
the international and domestic tobacco units, Camilleri told analysts
and investors on a conference call.

Camilleri said the company may face a court challenge to the Kraft
spinoff. Smokers of ``light'' cigarettes who are suing the company and
other U.S. cigarette makers have said they may try to block a transaction.

Actions Considered

An injunction would ``not have merit,'' Camilleri said.

Michael Hausfeld, the lead attorney for the smokers, said in an
interview last week that his clients ``would have to consider some legal
action to address that.''

Kraft said Oct. 23 that third-quarter profit increased 11 percent to
$748 million, or 45 cents a share, as it charged more for Oscar Mayer
deli meat. Northfield, Illinois-based Kraft's revenue, up 2.3 percent to
$8.24 billion, trailed the average $8.26 billion estimate of analysts.

For Altria's third-quarter profit, Jonathan Leinster, an analyst at UBS
Ltd. in London, estimated $1.40 a share, 1 cent less than the average
estimate of 11 analysts surveyed by Thomson Financial. Leinster is among
analysts top ranked for accuracy by StarMine Corp. Thomson doesn't
disclose to Bloomberg News the basis for the estimates in its survey.

Falling Shipments

Altria raised its 2006 profit forecast because of a gain from an asset
sale by Kraft. It expects to earn $5.48 to $5.53 a share, up from its
July forecast of $5.40 to $5.50.

Altria's international tobacco shipments fell 0.5 percent to 215.9
billion cigarettes in the third quarter, hurt by declines in Portugal
and Spain.

Price cuts in Spain to compete with less-expensive rivals and lower
volume in Japan pushed Philip Morris International's profit down 3.8
percent to $2.1 billion, Altria said.

Tobacco profit in the U.S. rose 5.7 percent to $1.3 billion after
Marlboro's market share increased 0.5 percentage point to 40.6 percent.
Higher prices helped results, even as total shipments declined 0.6
percent to 47.6 billion cigarettes, Altria said.

The company's Richmond, Virginia-based Philip Morris USA unit attracted
smokers by promoting some Marlboro brands with buy-one-get-one-free
offers in markets such as Greensboro, North Carolina.

To contact the reporter on this story: Chris Burritt in Greensboro,
North Carolina at cburritt@bloomberg.net <mailto:cburritt@bloomberg.net>

/Last Updated: October 25, 2006 15:27 EDT/