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First came the snack break. Altria spun off its Kraft food business, releasing it from the cloud of litigation risk. That made complete sense. Now it is following through with a cigarette break. Altria on Wednesday announced plans for the long-anticipated split between its fast-growing international business (Philip Morris International) and its mature US operations.
The split no longer looks as compelling as it did. As litigation risk has subsided Altria has narrowed the valuation gap with international rivals. A few overseas consolidation opportunities have slipped away: Japan Tobacco bought Gallagher of the UK and Imperial is buying Altadis of Spain. And splitting up has its disadvantages. Not least, Altria’s Marlboro brand would be owned by two companies with potentially differing views on how to position it. New product development would no longer be shared.
That said, Altria can still justify pressing ahead. First, as regards litigation, a split would theoretically give PMI (almost three-quarters of Altria’s tobacco revenue) a clean bill of health. That could lure in timid investors worried about legal woes returning to haunt the US business. Second, from a business perspective, PMI will have a very different profile. Volumes are growing rapidly, especially in Asia. It has space to grow market share and use its strong balance sheet to pursue what international deals are left. The US business, by contrast, already has 50 per cent market share and volumes are declining. It must focus on building a presence in smokeless tobacco while maximising cash returns to shareholders.
Altria has a story to tell. But, given the record of recent demergers, it might take longer than hoped for any benefits to be reflected in the share price of the new companies.