Why Altria Should Spin-Off SABMiller Stake
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Altria (NYSE: MO) may be better known for American cigarettes, but it also holds a hefty beer and wine interest in the form of SABMiller (NASDAQOTH: SBMRY). Altria has a 28.7% interest in the brewing company, which is worth $23.84 billion using SABMiller's current market cap.
Thus, if investors remove the impact of SABMiller in Altria's market cap, the tobacco company as a alone is worth about $45 billion.
Here's why Altria should spin-off SABMiller
Divesting Altria's alcohol interests should help the company realize its value. Spinning off SABMiller makes sense because
Different growth profiles – American cigarette volume is in perpetual decline, falling at a rate of about 1.5% per year. SABMiller, however, sees global beer volume growing at 2.4% per year.
Different markets – After Altria's spin-off of Kraft and Philip Morris International, the company became a near pure-play on domestic U.S. tobacco consumption. SABMiller is growing fastest in foreign markets, including Latin America, where it grew EBITA by 14%, Asia Pacific, where EBITA grew by 30%, and Africa, where EBITA grew by 16%.
Altria's spin-off abilities – Altria has efficiently spun off holdings in Kraft, Philip Morris International, and other brands. Spinning off its position in SABMiller to share holders should be no difficult task at all. And, if done correctly, it would avoid the 35% corporate income tax that Altria would have to pay to simply sell its position.
Shareholder value creation – Tobacco and alcohol stocks are well-known as “sin stocks,” but the regulatory environment and risks are vastly different. Whereas there seems to be little to no curb on the consumption of alcohol, the risks to the tobacco industry in the form of litigation and smoke-free environments do put a damper on the value of the tobacco business. There are a great many investors who are keen on holding alcohol names, but generally disinterested in tobacco stocks.
The marked difference between these two companies justifies a spin-off to create shareholder value. Simply put, Altria is an American tobacco company facing volume declines, whereas SABMiller is an international brewing company facing rapid volume growth in emerging markets. The only similarity between these two names is that they're both sin stocks - that's it.
Balancing market valuations
Given Altria's massive SABMiller holdings, which do not contribute to the consolidated financial statements, Altria trades at a significant discount to its international spin-off, Philip Morris International (NYSE: PM).
Philip Morris International currently trades at 14 times forward earnings estimates, whereas Altria trades at 13.2 times forward earnings, including the valuation impact of SABMiller. If SABMiller is subtracted from Altria's market cap, the company trades at just 8.68 times forward earnings. That's an attractive valuation for a pure-play on American tobacco. Now Altria just needs to return to its pure-play status by spinning out its SABMiller ownership stake.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!