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NEW YORK -- As part of the company's strategy to grow its business outside of the cigarette category, Altria Group Inc., parent company to Philip Morris USA (PM USA), signed agreements to acquire John Middleton Inc., a manufacturer of machine-made large cigars, including the Black & Mild brand, from privately held Bradford Holdings for $2.9 billion in cash, the company stated.
"This acquisition, which takes place on the eve of Altria Group Inc.'s intended restructuring, is being undertaken to enhance our long-term growth momentum in the U.S. market and create shareholder value," Michael E. Szymanczyk, chairman and CEO of PM USA, said in a statement. "The acquisition is both strategically compelling and financially attractive. It fits squarely with our announced strategy to grow our U.S. tobacco business beyond cigarettes and complements our recent initiatives in the smokeless category."
As part of the agreement, John Middleton will continue to operate from its facilities in King of Prussia and Limerick, Pa. Current president of John Middleton, Orrin Ridington Jr., will continue to lead the company's operations and will work closely with the PM USA management team to capitalize on each company’s strengths, while Clinton Price Sr., the current CEO of John Middleton, will retire as previously planned and has agreed to be available in an advisory capacity during the transition period, the company stated.
"We look forward to welcoming John Middleton Inc.'s talented employees to the Altria family and to building upon the company's strong growth track record," Szymanczyk added. "The plan is to accelerate the Black & Mild brand's market share growth momentum in the years ahead by leveraging the expertise and capabilities of both John Middleton Inc. and PM USA."
John Middleton's operating revenues are expected to reach $360 million in 2007, with an operating income of $182 million. In 2007, total company cigar volume is expected to reach a level of 1.2 billion units, the company stated.
"While there may be some cost savings, captured predominantly through procurement synergies and the elimination of duplicative expenses, the real appeal of this acquisition is to capitalize on PM USA's sales, distribution and marketing infrastructure and expertise," Szymanczyk added. "Further, PM USA will contribute its strong capabilities, resources and focus on corporate responsibility, including youth smoking prevention."
In a research note to clients, Citigroup analyst Bonnie Herzog said of the acquisition "Given the growth prospects of the US cigar category and the brand equity of Middleton's No. 1 brand Black & Mild […] we believe this acquisition is very positive for PM USA and fits perfectly into our thesis that PM USA will become a full 'tobacco' company once the spin-off occurs."
In addition, Herzog said PM USA may have thought about possibly extending the Black & Mild brand into a menthol cigarette, as it has strong brand equity, especially in inner cities.
She added: "Given PM USA's vast distribution network, sales force and strong relationships, it seems logical that the company could expand the distribution […] of Black & Mild by increasing its shelf space allotment and overall awareness of the cigar category."
The transaction, which is subject to regulatory approvals, is anticipated to be completed by the end of 2007. The net cost of the acquisition, after deducting present value tax benefits arising from the transaction terms, is $2.2 billion, the company stated. The acquisition will be financed with existing cash and is expected to be modestly accretive to Altria's 2008 earnings while generating a double-digit economic return.