Altria Buys Cigar Firm, Cuts Jobs
Sometimes a cigar is just a cigar. And sometimes that cigar is worth billions.
On Thursday, Altria (nyse: MO - news - people ) announced on Thursday it agreed to spend $2.9 billion cash for the King of Prussia, Pa.-based John Middleton, a maker of large, machine-made cigars.
The move will not only cost dollars, though, but jobs. Altria, now based in New York, will move its headquarters to Richmond, Va. where its brand Philip Morris USA is located, and cut 400 jobs. It has also opened a research center in Richmond to develop new products to replace cigarettes.
Shares of the Altria slipped 0.5%, or 40 cents, to $72.53 in morning-trading.
With cigarette consumption steadily declining in the U.S., Altria has looked for products, such as cigars and smokeless tobacco, to fill the gap.
Altria Group owns Philip Morris, maker of brands like Marlboro, Virginia Slims, Parliament and Basic, and started earlier this year to use its recognizable Marlboro brand to test market smokeless products in the Dallas/Fort Worth and Atlanta metropolitan areas.
"It fits squarely with our announced strategy to grow our U.S. tobacco business beyond cigarettes and complements our recent initiatives in the smokeless category," said Philip Morris USA Chief Executive Michael Szymanczyk.
JPMorgan analyst Erik Bloomquist, who took a positive look on the deal, noted that the John Middleton buy doesn't preclude other "adjacent" deals, as Altria sees snuff and cigars as the two fastest growth adjacent tobaccco categories to cigaretes.
In the deal to buy John Middleton, maker of Black & Mild cigars, Altria Group Inc. said the purchase price includes about $700 million in tax benefits. Excluding those benefits, the acquisition is valued at $2.2 billion.
The company said it will finance the deal with existing cash. Altria is buying John Middleton from privately held Bradford Holdings.
Bloomquist told investors that John Middleton holds about half the U.S. market for cheap cigars.
John Middleton makes large machine-made cigars. Volume for that segment of the cigar market for 2007 is estimated at 5.3 billion cigars, according to Altria. Altria estimated the growth rate for large machine-made cigars was 4 percent annually from 2003 to 2007.
"The business provides a growing stream of operating income to Altria's very mature U.S. cigarette franchise, as well as a broader platform for future growth," Morgan Stanley analyst David Adelman told investors. He criticized Altria for paying what he said was "full price," however.
The acquisition comes as Altria prepares to spin off its Philip Morris International division (See "Altria Takes Last Drag On International Tobacco Unit"). The board is expected to announce the exact timing of the spinoff on Jan. 30. The split is expected to free the international unit to more aggressively pursue sales in emerging markets without the pesky legal and regulatory constraints the U.S. unit faces.
Altria reported strong quarterly results last month on the back of its international sales (See "Altria Earnings Kick Butt").
Altria said it expects John Middleton's sales to reach $360 million in 2007 and operating income to hit about $183 million. Altria said it expects the deal to close by the end of the year. The acquisition should add to earnings next year.
Besides the Philip Morris units, Altria owns a 29% stake in London-based SABMiller, which brews Miller Lite beer.
Thursday, November 01, 2007