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Altria Ready to Consider Next Breakup: Tobacco Wall Street Journal -- February 6, 2007 By Vanessa O'Connell Having set a March 30 date for the spinoff of its roughly 89% stake in Kraft Foods Inc., Altria Group Inc. is now expected to decide on the next phase of its restructuring: splitting its U.S. tobacco operations from its international business. A board decision on the separation of the tobacco businesses is expected later this year, and in the eyes of many analysts, an official acknowledgment of the move by Altria could push Altria shares higher. "There are clearly measures we can take going forward to enhance shareholder value," said Altria Chief Executive Louis Camilleri in an interview yesterday, noting a "conglomerate discount" has affected Altria shares. Altria has been contemplating the two-stage breakup for several years. Separating the international and U.S. parts of Philip Morris makes sense because while both Philip Morris USA and Philip Morris International sell Marlboro cigarettes, they face differing regulatory landscapes and growth prospects. If the companies do split, Mr. Camilleri wouldn't say what he personally would do. "The board will decide that," he said, noting that "I would hope to be associated with one of the components." Asked if he liked the weather in Switzerland, where PMI is based, Mr. Camilleri, 51 years old, said, "I lived in Switzerland for 20 years, so yes, I like it very much." Then he added: "But there are other countries I quite like as well." Mr. Camilleri said that overseas, the biggest problem is a lack of "fair and equitable tax structures" in certain markets -- such as cigarette competitors in Germany that have enjoyed lower taxes and therefore lower prices. But he said lawsuits are less of a problem. "America is a litigious society. Luckily this country has been unable to export it." Some disagree. Kathryn Mulvey, executive director of Corporate Accountability International, an antitobacco watchdog group, noted that as individual countries enact legislative and regulatory measures making it easier for the local smokers to sue, Philip Morris International could face more lawsuits. The split "could allow Philip Morris USA to be shielded from any liabilities it faces internationally. That would be a big concern," Ms. Mulvey added. As for regulatory pressures overseas, Mr. Camilleri said: "In most instances, we are very supportive of regulation. We share the belief that we need to reduce the harmful effects of smoking." Last year, PMI named a veteran pharmaceutical executive to head research and development. In the U.S., Philip Morris has 50.3% of the cigarette market, a position that helps give it pricing power and high profits -- $4.8 billion in operating income last year. But the number of U.S. smokers declines steadily: Philip Morris USA's sales fell 1.1% to 183.4 billion cigarettes in 2006. Altria is lobbying to have Congress give the Food and Drug Administration oversight of tobacco, a move other cigarette companies would oppose. As for a move into pharmaceutical products, such as systems to deliver medicine into the lungs, Mr. Camilleri said, "I'm not going to go there." He said the focus would be on developing "lower-risk" products. By contrast, Altria's international tobacco operations are still growing. Overall, Philip Morris International sold 831.4 billion cigarettes in 2006, up 3.4%, while operating income rose 8.1% to $8.5 billion. PMI has a licensing deal with China National Tobacco Corp. for Marlboro. Nearly two trillion cigarettes a year are consumed in China. "Our ambition is to become [CNTC's] No. 1 strategic partner, but that will take time," Mr. Camilleri said, acknowledging that Marlboro's market share is tiny. "Marlboro has significant brand equity in China," he added, "and we'll see how it develops over time ... Ultimately the market will open up." Mr. Camilleri called this "the best litigation environment ever" for tobacco companies in the U.S. But it is possible the Kraft spinoff could be delayed if plaintiff lawyers seek to block it in court, arguing that it amounts to a move to shield corporate assets. Would Altria consider settling any lawsuits that might come up? "Never," Mr. Camilleri said. As for Altria's custodianship of Kraft, he said, "I think the company brought a lot to Kraft in terms of a discipline and control environment that didn't exist at the time." He acknowledged that because of problems such as rising commodities prices, the past few years had represented "hard times." He said that Kraft, by embracing certain restrictions on unhealthy food for children, had taken a "leadership role in the industry" and "learned from our experience" even when it hurt the bottom line, such as when Kraft declined to advertise kids' cereal to young children on TV, while some of its competitors persisted. Write to Vanessa O'Connell at vanessa.oconnell@wsj.com23
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