New York, Jan. 14 - There is always an argument over what to do with the leftover beer.
Later this month, tobacco giant Altria Inc. (MO) will provide details of how it will spin off its international operations, the faster-growing arm of its tobacco operations. When that is done, it will be left with the slower-growth domestic cigarettes business, Philip Morris USA, and a 28.6% stake in U.K.-based brewer SABMiller (SAB.JO), maker of Miller and Castle beers. It is a stake some value at more than $11 billion - capital which could prove useful as Philip Morris USA tries to keep investor interest, given that U.S. cigarette sales have been dipping.
The SABMiller stake hasn't received much attention so far in the break up of the giant conglomerate, but it could play a important role in the financial direction of the leftover company.
Some investors and analysts say Altria may gradually sell off its stake in SABMiller and return the cash to shareholders in some way like a higher dividend or a large stock buyback. The SABMiller stake would also be valuable to the remaining company as a cushion that mitigates the risk of litigation, or as collateral for bonds.
"Shareholders are going to look for further ways for Altria to unlock value and one way would be to sell the shares of SABMiller and buy back (Altria) shares," says Lyn White, investment officer at Christiana Bank and Trust, which holds Altria shares. Stockholders might also prefer to see Altria as a pure-play company focused solely on tobacco, she says. Altria declined to comment on any possible plans for its SABMiller stake.
Despite the many options that Altria has, it could be a while before it provides any firm indication about what it will do with SABMiller. "I don't know if it would happen right away. They have been cautious and methodical in their decisions," says White.
Morningstar analyst Greggory Warren believes that, if Altria decides to sell its stake in SABMiller, it would do so in stages and would likely give SABMiller the option of being the first buyer.
"I look at it as cash to do whatever they have to," says Warren. He points out that Altria - sans Philip Morris International - will likely make an acquisition in the smokeless tobacco sector and will also have to maintain a strong dividend to keep investors interested. Analysts have long speculated about a number of potential acquisitions that Altria could make, saying potential buys include smokeless-tobacco maker UST Inc. (UST) and snuff maker Swedish Match AB (SWMA.SK). Warren - who believes that a UST buy is more likely - says the SABMiller stake could be helpful in making such an acquisition.
Still, Warren also points out that Altria will be able to raise debt, and that a sale of the Miller stake won't be imperative to fund any acquisitions.
Brian Barish, director of research at Cambiar Investors, which holds Altria shares, believes Altria could use its SABMiller stake to fund some of its buybacks. But the more likely option, he says, would be for the company to hang on to the stake and have it act as collateral for bonds they decide to offer.
The stake that Altria currently holds in SABMiller is already the result of some complex restructuring. In 1969, the company that was then called Philip Morris bought 53% of Milwaukee's Miller Brewing Co. from W.R. Grace & Co. (GRA). It later acquired the remaining 47% of Miller from De Rance Foundation in Milwaukee. In 2002, Miller Brewing Co. merged into South African Breweries to form SABMiller, the world's second-largest beer company, with Philip Morris Cos. retaining a voting and economic interest.
Altria's final steps of breaking up would mark the end of several years of waiting. The tobacco giant had long said it hoped to eventually unleash shareholder value by separating its various subsidiaries. The specter of tobacco litigation, however, kept those plans on hold for several years. The company had several major legal victories last year, paving the way for a break up.
That said, although the legal environment for tobacco companies in the U.S. has improved considerably, that specter hasn't completely passed. That could force Altria to wait for a while before it decides to let go of the safety cushion that is SABMiller.
Tobacco-litigation risks are still very real in the U.S., even though the direction of those legal problems has been positive, says Ken Shea, a tobacco debt analyst at Standard & Poor's. For instance, the U.S. Department of Justice still hasn't officially withdrawn its suit against the tobacco companies, he points out.
Given those risks, it might make sense for Altria to hold on to the SABMiller stake, Shea says. "It's a nice war chest to have as a contingency plan," he adds. "It might serve a greater purpose to have a war chest there after the spin."
The last few months have already been a period of enormous change for the tobacco giant. Altria spun off Kraft Foods Inc. (KFT) in March, and in August announced plans to spin off Philip Morris International. On Jan. 30, the company will specify the exact timing of the Philip Morris International spinoff.
So far, Altria has been noncommittal about plans for the SABMiller stake. "We believe that SABMiller still has significant growth potential. And I think Altria will ride that wave just the way we have so far and benefit from the financial flexibility that important asset provides it," Chief Executive Louis Camilleri said in August while announcing the Philip Morris International spinoff. At that time, the company put the market value of its SABMiller stake at about $11.2 billion.