Altria Group Inc., the world's largest tobacco company, agreed to buy cigar maker John Middleton Inc. for $2.9 billion in cash to counter falling U.S. cigarette sales.
John Middleton, the maker of Black & Mild cigars and a unit of closely held Bradford Holdings, may have $350 million in sales this year, the companies said today in a statement. The purchase puts New York-based Altria in a growing market as it prepares to separate its international division from the U.S. cigarette unit.
The acquisition is the biggest in the 105-year history of Altria's Philip Morris USA division. John Middleton will lessen the company's dependence on cigarettes as demand for top-selling Marlboro falls. Altria plans to boost the cigar unit's sales with a distribution network that delivers one of every two cigarettes sold in the U.S.
John Middleton ``is growing much faster,'' said David Dreman, who oversees $22 billion, including 16.5 million Altria shares through June, at Dreman Value Management LLC in Jersey City, New Jersey. ``Cigarettes overall are declining in this country.''
Altria's cigarette sales and deliveries to wholesalers are declining, while John Middleton's revenue has grown by 10 percent annually since 2003. The Black & Mild brand generates 23 percent of U.S. sales of machine-made large cigars, the companies said.
Altria fell $1.05, or 1.4 percent, to $71.88 at 4:01 p.m. in New York Stock Exchange composite trading. It has gained 12 percent this year, while Reynolds American Inc., the second- biggest U.S. tobacco company, is down 3.8 percent and snuff maker UST Inc. declined 11 percent.
Altria said it expects to receive $700 million of tax benefits from the transaction.
Revenue at Richmond, Virginia-based Philip Morris USA declined 0.6 percent to $9.05 billion in the first half of 2007. Falling cigarette shipments contributed to a 12 percent decline in operating profit to $2.13 billion.
Philip Morris USA delivered 71 billion Marlboro cigarettes to distributors in the first half of 2007, 4.1 percent fewer than in the same period a year earlier, Altria said in a quarterly securities filing.
Last month, Philip Morris USA began marketing snuff under the Marlboro brand in Atlanta. It trails UST and Reynolds in smokeless tobacco, a $3.7 billion market that grew more than 8 percent last year. Americans smoke 1 percent to 2 percent fewer cigarettes each year.
``Altria sees snuff and cigars as the two fastest-growth adjacent tobacco categories to cigarettes,'' Erik Bloomquist, a J.P. Morgan Ltd. analyst in London, wrote today in a note to clients. He rates the stock as ``overweight.''
John Middleton, founded 151 years ago, will continue to operate out of Limerick, Pennsylvania, after the transaction closes at the end of this year. The cigar maker may have operating profit of $182 million in 2007, the companies said. ( Bloomberg )