Business

Philip Morris plant closing may signal spin-off

This aerial photograph taken Tuesday shows the Philip Morris plant in Concord, N.C. Altria Group, parent of the Philip Morris cigarette companies, announced Tuesday it is closing the plant, which employs 2,500.
This aerial photograph taken Tuesday shows the Philip Morris plant in Concord, N.C. Altria Group, parent of the Philip Morris cigarette companies, announced Tuesday it is closing the plant, which employs 2,500.

CONCORD, N.C. -- Cabarrus County's gut-wrenching loss of the Philip Morris cigarette plant likely signals a deal to spin-off the Marlboro maker's international tobacco business as a separate company.

The behemoth factory is part of Philip Morris USA, but about 20 percent of the cigarettes it made last year went abroad for sister company Philip Morris International. Both units are part of Altria Group.

On Tuesday, Altria said it would close the Concord plant and move production for U.S. sales to its headquarters plant in Richmond, Va. Foreign production from both factories will move overseas.

Two trends -- dwindling U.S. consumption and exports -- are snuffing the high-tech, efficient Concord plant that opened in 1983.

The shutdown follows 25 years of declining U.S. cigarette sales, amid growing concerns about deadly side effects, sharply higher taxes and smoking bans. The nation's cigarette exports also have plummeted as competition from foreign manufacturers increased and the quality of tobacco and overseas production improved. And sales are growing abroad.

Those factors make a case for letting the foreign unit stand alone, and that's how Wall Street analysts interpreted Tuesday's news.

"This is pretty much the first step," said Herb Achey, a senior equity analyst at U.S. Trust Co. in New York. "It's kind of like taking your family photos out of the beach house before you sell it."

The Concord plant is scheduled to close by the end of 2010, leaving Richmond as the company's only U.S. plant. North Carolina still will be home to the No. 2 U.S. cigarette maker, Winston-Salem's Reynolds American. The company, owner of R.J. Reynolds Tobacco, also has struggled with declining sales and layoffs.

Altria expects the consolidation will generate annual savings of $335 million by 2011. Upfront, the company will take a charge this quarter of $325 million, mostly for layoff costs.

Philip Morris still dominant

U.S. cigarette sales peaked in 1981 and have fallen since. Last year, Americans bought about 371 billion cigarettes. That's a little less than in 1950 when the nation's population was about half today's level.

Philip Morris USA dominates this declining market, accounting for half the smokes sold in America with Marlboro its runaway bestseller. The company's other main brands are Parliament, Virginia Slims and Basic, a discount brand.

In total, Philip Morris sold more than 183 billion cigarettes in the U.S. last year, a decline of about 1.1 percent.

Philip Morris International estimates it has about 15 percent of the foreign market, estimated at more than 5 trillion cigarettes a year. The company sells more than four times as many cigarettes overseas as it does in the U.S., and that volume grew last year.

Growing exports briefly helped offset declining domestic sales. In the 1990s, foreign sales even drove big expansions at the Concord plant. But foreign production has shifted abroad.

Total U.S. exports, which helped offset domestic declines, have dropped by more than half from a 1996 peak.

The Concord and Richmond plants supplied about 80 billion cigarettes last year to Philip Morris International. By the third quarter of next year, cigarettes for foreign sales will be made overseas. The company says it hasn't decided where.

Through subsidiaries and affiliates Switzerland-based PMI owns, leases or has an interest in 71 factories in 34 countries, according to a March filing with securities regulators. That includes cigarette plants in the Netherlands, Germany and Russia.

Altria stocks rise

Wall Street liked Altria's Tuesday announcement, which propelled the stock to close at $69.63, up 88 cents, or 1.3 percent.

The company wouldn't comment on whether a spin-off is in the works. In April, Altria CEO Louis Camilleri told investors the company is "carefully and diligently" exploring a potential spin-off of its foreign business.

A move to separate PMI reflects its growth, acquisitions and progress in improving quality and production at foreign factories.

"The international business now has the size, scope, manufacturing facilities and leaf production," said Achey with US Trust, which owns Altria shares.

Analysts expect an independent PMI, free of U.S. litigation and regulations, to be more aggressive in doing deals and seeking growth globally. Smoking is declining in some developed countries, as it is the U.S., but is on the rise in some poorer nations. Population growth also can add to the number of smokers, even if overall smoking rates declines.

"If the market was looking for a definitive signal that Altria intends to spin off international tobacco, today's announced plant closuresall but gives away the ending," Deutsche Bank analysts said in a note to investors.

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