NEW YORK — In a move that would end the company’s diversification into the food business, Altria Group, Inc. on Jan. 31 said its board has voted to authorize the spin-off of its shares of Kraft Foods to Altria shareholders.
Under the plan, Altria would distribute the 89% of Kraft Foods it still owns on March 30, to shareholders of record at 5 p.m. E.S.T. on March 16. Altria said it will distribute about seven tenths of a share of Kraft for every share of Altria stock outstanding as of the record date. The precise distribution ration will be determined 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 chief executive officer. "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."
Following the spin-off, Altria will not own any shares of Kraft. Kraft has operated as a publicly-traded company separate from Altria since a 2001 initial public offering of 11% of the outstanding shares. Altria has retained its majority ownership of Kraft since then.
In connection with the announcement, Kraft announced that its board has approved a number of changes that will become effective with the spin-off.
Mr. Camilleri will resign as chairman of the Kraft board but will remain a Kraft director. Irene Rosenfeld, chief executive officer of Kraft, will be elected to the additional post of chairman. Two other Kraft directors — Dinyar Devitre and Charles Wall — will resign from the Kraft board. Additionally, Kraft said it will appoint a lead director from its independent directors.
Altria cited a number of benefits it said would result from the spin-off:
o Enhancing Kraft’s ability to make acquisitions, particularly because it will be able to use Kraft shares as "acquisition currency," and therefore helping Kraft compete more effectively in the food industry;
o Allow management of Altria and Kraft to focus more effectively on their respective businesses;
o Improve Kraft’s ability to recruit and retain management and independent directors;
o Provide greater aggregate debt capacity to both Altria and Kraft;
o Allow Altria and Kraft to target their respective shareholder bases more effectively and improve capital allocation.
Altria said a "when issued" public market for Altria common stock (without the Kraft portion) will be established shortly and will continue to trade until the spin-off.
With the distribution, Altria will end a major diversification effort into the food business dating back 21 years to its 1985 acquisition of General Foods for $5.6 billion. At the time, it was the largest non-oil acquisition in U.S. history. Three years later, Altria (Philip Morris Companies at the time) acquired Kraft for $12.9 billion, setting another record for non-oil acquisitions.
Commenting on the proposed spin-off, David C. Nelson of Credit Suisse said the transaction will be more dilutive to Kraft earnings than he had anticipated.
"There will be 2c of e.p.s. dilution to the share count that is a negative surprise from splitting Altria employee stock options into adjusted Altria and Kraft stock options," he said.
Mr. Nelson said the spin-off likely will raise the Kraft tax rate to 35.5% in 2007, higher than the level he had expected — 33.5%. He noted that each percentage point of tax rate equates to 3c of earnings per share.