The Marlboro Man is surrendering his passport.
After spinning off Kraft Foods, tobacco giant Altria Group is set to hive off its international arm, Philip Morris International. It seems like an odd decision. The risk of crippling U.S. lawsuits -- a major rationale for separating the businesses in the first place -- has mostly subsided. And a spinoff might not unlock much shareholder value anyway.
Getting rid of Kraft was a no-brainer. Making Oreos and cigarettes under the same roof never made much sense. But PMI is a different story. Synergies with the domestic cigarette business would vanish by separating them. And strategically, PMI's growth balances the domestic arm's weaknesses.
Tobacco consumption in the U.S. is shrinking. Overseas, the tobacco trade is booming, particularly in emerging markets, and accounts for about two-thirds of Altria's overall profit. There's an argument for milking the mature cash flows of the domestic business to feed faster-growing markets.
That's especially true when it's not clear what financial engineering can accomplish. Assume that Altria's international business fetches an enterprise value comparable to British American Tobacco's, at 12 times earnings before interest, tax, depreciation and amortization. For Altria's U.S. arm, assign a multiple of six times -- a premium to Carolina Group, the tobacco unit of Loews Corp. The result is a blended multiple of about 10 times -- in line with Altria's $146 billion market value.
Sure, PMI now can offer its managers incentives with a currency all their own. And removing any lingering association with the U.S. might make it easier for PMI to woo potential acquisition targets overseas. Yet these are fuzzy benefits. Without a clear path for creating value, Altria's board may regret letting the Marlboro Man's more-worldly cousin ride off into the sunset.
Pox on Both Housing Markets
A year ago, Britain probably looked more vulnerable than the U.S. to problems in the housing economy. Confidence, the expectation that prices would only go up, was equally extravagant in both countries. Economic news also was equally supportive, with solid growth and low unemployment.
But house prices looked bubblier in Britain. In the decade up to 2006, the gap between growth in house prices and in nominal per-capita gross domestic product was 69 percentage points in the United Kingdom. In the U.S., it was 20 percentage points. Also, the recent increase in overnight interest rates should have been more painful in the U.K., since almost all British mortgages are variable-rate, in which the interest rate changes along with short-term rates, although sometimes after a delay. Most U.S. mortgages have fixed 30-year rates.
Yet it was the U.S. housing market that got into trouble -- the average home price is down 3% in a year, and unsold new houses are piling up. Repossessions are up in the U.K., but so is the average price -- 12% from a year ago, according to Halifax, a U.K. bank.
Two trans-Atlantic differences explain some of the U.K.'s resilience. Construction of new housing is a big and highly cyclical industry in America and a midsize and stable affair in the U.K. The U.K. doesn't have to deal with the price-depressing effect of homes dumped on the market by cash-strapped builders.
Second, lenders in the U.K. have to keep a higher proportion of their loans on their own balance sheets -- something like 80%, against 20% in the U.S. That has probably kept British lenders from going to extremes in subprime lending.
Still, investors in U.K real estate shouldn't assume the housing ladder will reach to the sky. Two million borrowers face higher interest payments in the next year, when their two-year teaser rates expire. If enough of them are forced to sell, or if unemployment picks up, the U.K. could start to look a bit more American.
From More source
(MSN)Altria to split up Philip Morris.
Altria Group on Wednesday said it would split the international and domestic operations of Philip Morris, the world's biggest cigarette maker, into separate public companies in a long-anticipated move.
The fast-growing international unit, Philip Morris International, will be spun off to shareholders, severing it from Philip Morris USA, which is suffering from falling US cigarette consumption. The spin-off is set for next year after a unanimous board vote. Timing will be given on January 30.
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Louis Camilleri, Altria chief executive, will become chief executive of PMI, whose operations are based in Lausanne, Switzerland, but with a small headquarters office retained in New York. Altria will in effect become PMUSA, led by Michael Szymanczyk, and it will retain its 28.6 per cent stake in the brewer SABMiller.
The move will complete the break-up of the Altria conglomerate, highlighted by the closure of the New York headquarters, cutting about 400 parent company jobs with an estimated $250m in cost savings.
Altria has restructured, including a spin-off in March of Kraft, its US food unit, to boost value for shareholders as the US tobacco litigation threat receded.
The last step marking a milestone in the global tobacco industry was to restructure Philip Morris, which makes Marlboro, one of the world's most recognisable brands, and PMUSA's and PMI's increasingly different business agendas. Mr Camilleri said: "I am convinced that this transaction will enhance growth at both Altria and Philip Morris International."
A standalone PMI would be a fast-growing global contender. It has a 15.4 per cent share of the international cigarette market, but only 5 per cent of its profits come from emerging markets, which make up 60 per cent of international cigarette consumption. Its balance sheet would be strong and its stock would be robust currency to participate in rapid industry consolidation.
PMI, which accounts for almost three-quarters of the cigarette makers' total revenue, has made recent acquisitions in Indonesia and Pakistan and eyed fast-growing Asian and eastern European cigarette markets.
Bonnie Herzog, analyst at Citigroup, said: "It's at this point that we expect the beast to be unleashed...and shareholders will be rewarded."
Separating PMI and PMUSA is likely to cheer Wall Street as it will free both groups to become more efficient. Altria shares were up by just over 1 per cent at $69.80 at the close.