It is very old news that Altria (MO) will spin off its Kraft (KFT) food operations to the public. But, there is much debate about what happens next.
Recent comments in the Financial Times would indicate that Altria would take its tobacco operations and break them into two divisions, one domestic and one international. In the last quarter (10-Q), domestic tobacco operations showed little growth compared to the previous year with revenue going from $4.7 billion to $4.8 billion. But, the international tobacco segment, while larger, was not a growth engine either.Revenue rose from $12.1 billion to $12.7 billion. Operating income at the international operations actually dropped slightly.
The lack in growth in both international and domestic tobacco at Altria would argue for keeping them together to leverage manufacturing and marketing scale and prevent having two corporate cost structures. A split up might have legal advantages due to the tobacco health lawsuits in the US. But, most of those are behind the company.
The other path would be to buy other tobacco companies and use Philip Morris’ scale to drop costs. Bloomberg has recently reported that this is the more likely path and that targets might include UST (UST) or Imperial Tobacco (ITY). The news report quotes both Deutsche Bank and Gardner, Russo & Gardner analysts.
That may make the smaller tobaccos a buy.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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