Altria's Kraft-y Decision

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Altria's Kraft-y Decision

NEW YORK -- Altria Group's board of directors approved the spin-off of all the company's shares of Kraft Foods Inc. to its shareholders.

The plan will distribute approximately 89 percent of Kraft's outstanding shares owned by Altria on March 30. Altria shareholders as of 5 p.m. on March 16 -- the record date -- will be eligible to receive the shares.

The company will distribute approximately .7 of a Kraft share for every share of Altria common stock held by shareholders as of the record date. For Altria fractional shares that are less than .7 of a share, shareholders will receive cash instead. The exact distribution ratio will be decided on the record date.

"I am extremely pleased to announce the spin-off of Kraft today, a major step in our commitment, announced more than two years ago, to deliver superior shareholder value," said Louis C. Camilleri, Altria chairman and CEO. "I believe that an independent Kraft will enjoy enhanced flexibility to grow its business and be in a substantially stronger position to create enduring shareholder value."

The company believes that the spin-off will provide benefits for both parties, which include:

-- Kraft will have a better ability to make acquisitions, allowing it to compete more effectively in the food industry;
-- Both parties can focus on their respective businesses and improve Kraft's ability to recruit and retain management and independent directors;
-- Both companies will be provided with a greater aggregate debt capacity; and
-- Capital allocation within each company will be improved, and both companies can target their respective shareholder bases more effectively.

Investors are pleased that Kraft will be leaving Altria, but not for the sake of the Oreo and Velveeta cheese maker. The idea that Altria will once again focus on tobacco has sent the company's stock uphill since the announcement was made in October, according to a report in The New York Times.

"Something that is forgotten in all of this is people like to smoke," David Adelman, a Morgan Stanley analyst, told the Times. "It's enjoyable and there's not an alternative product."

Altria will be able to acquire other tobacco companies, both domestically and abroad, through large amounts of cash made from cigarettes. "You take away Kraft out of Altria and you are left with a balance sheet that is extremely strong," said Charles Norton, portfolio manager at Vice Fund, of which Altria is the company's biggest holding. "It's just a cash cow. The free cash flow on this business is just tremendous."

Possible acquisitions include UST Inc., a snuff manufacturer, or Europe's Imperial Tobacco Group, Plc, analyst Marc Greenberg, of Deutsche Bank Securities Inc., told Bloomberg News.

"Altria will very much play a role in the consolidation of the global tobacco business," Thomas Russo, partner of Gardner Russo & Gardner told Bloomberg News. Russo held 4.2 million Altria shares as of Sept. 30, the report stated.

While the spin-off is a sign that the company's legal pressures have diminished, one lawyer in a case still pending is seeking an injunction against the spin-off. Michael Hausfeld, lawyer for the plaintiff, is fighting a case against tobacco companies that alleges cigarette manufacturers defrauded customers by marketing light cigarettes as safer than regular cigarettes.

The injunction to prevent Altria's sale of Kraft is due to a judgment so large, Altria would need Kraft to pay the damages. Kraft has a market capitalization of $57.25 billion.

"Apparently at this point they have decided to spin Kraft off because they believe there's a diminishment in their legal exposure," Hausfeld told the Times. "We disagree. If anything, the light's fraud presents the strongest legal merit claims against the industry and Philip Morris."

The company is not concerned about the threat of an injunction, however. Altria chief executive, Louis Camilleri, told investors during a conference call "We believe that such an action would not have merit and that we would ultimately prevail."

Altria common stock will be traded as 'MO wi' until the record date and after the distribution date. The 'wi' means "when issued" and refers to buying Altria stock without the Kraft portion. In addition, any seller of Altria stock on the market before the distribution date may be selling their entitlement to receive shares of Kraft when it is distributed.

Prior to the distribution, Altria will convert the Class B shares of Kraft into Class A shares. Following the distribution, only Class A shares will be outstanding for Kraft, where Altria will hold no shares of Kraft. Kraft is currently a publicly traded company, with its shares listed as "KFT" on the New York Stock Exchange.