Consumer Products

Altria: The Hidden SABMiller & Molson Coors Winner (MO, TAP, BUD)

If you follow beverage stocks or follow alcohol and beer stocks very much, you certainly saw the huge gains today seen in Canadian ADR’s of Molson Coors (NYSE:TAP).  Shares rose some 10% on four-times normal volume after the announcement that SABMiller plc and Molson Coors will combine U.S. brewing operations into a joint venture called MillerCoors.  The joint venture will be 58% owned by SABMiller and 42% owned by Molson Coors with each having an equal voting interest in an all out effort to cut costs to better compete against the dominance of Anheuser-Busch (NYSE:BUD) and the solid Budweiser brands.

This joint venture will result in a combined savings of $500 million annually which will be from reduced shipping distances, economies of scale, production and capacity utilization, and operational and advertising overlaps. The companies are projecting $6.6 Billion in combined U.S. sales.  Anheuser-Busch shares are down 1% on the day as its total sales in 2006 for domestic and international (plus equity partner sales) were $15.717 Billion in net sales.

Interestingly enough, Altria Group, Inc. (NYSE:MO) may be the hidden winner in this venture because it owns approximately 28.6% of SABMiller plc.  Altria is also the one that will hold the SABMiller interest after the previously announced pending spin-off of Philip Morris International occurs in 2008 (assuming it does).

On September 27, 2007, Altria Group, Inc. announced today that itswholly owned subsidiary, Philip Morris International Inc. (PMI), hasfiled a preliminary registration statement with the SEC in preparationfor the long-awaited potential spin-off of PMI from Altria. On August29, 2007, the Board of Directors of Altria announced its intention topursue the spin-off of PMI to Altria’s shareholders.  At that time, theAltria Board said that it anticipates that it will be in a position tofinalize its decision and announce the precise timing of the spin-offat its regularly scheduled meeting on January 30, 2008. As of June 30,2007, Altria Group, Inc. owned 100% of Philip Morris InternationalInc., Philip Morris USA Inc. and Philip Morris Capital Corporation, andapproximately 28.6% of SABMiller plc. 

The truth is that joint venture savings do not “Directly” flow throughto a company’s bottom line on a net cash basis depending on whichinternational laws are predominant and depending on which accountingmethods are used for minority interests.  But if the SABMillerfinancial interest is roughly 58% in the MillerCoors venture with some$500 million in savings, and assuming other things being equal, thenthe 28.6% stake would equate roughly $82.9 million in annual savingsthat Altria could attribute to its “value.”  This would particularly bedifficult to transfer as a direct financial benefit since South Africahas been historically one of the hardest countries to transfer hardassets out of.  Be advised that this is assuming purely static numbersand there is no real way for an outsider to calculate what can truly beattributed here.  In fact, it’s probably a safe bet that there areprobably only a few of the finance geeks inside the company itself thatcan answer this today off the top of their head.

Altria’s net income attributable for shareholders was $12.022 Billionin 2006, so this is one small step among many that would act towardbeing a benefit to the company.  The unofficial closing price forAltria was up 1.02% at $69.99, although that will likely be differentfrom the final adjusted closing price.

The ongoing situation for Altria Group and Philip Morris International will definitely qualify for a review in our “Special Situation Investing Newsletter” in the near future, and subscription trials are available.We are also going to open up our “Watch List” of small-cap Internetstocks that we are looking for potential takeover candidates.  We donot believe these are currently takeover candidates as the picturelooks right now, although under the right circumstances any of thesecould become takeover targets.

Jon C. Ogg
October 9, 2007

Jon Ogg produces the Special Situation Investing Newsletter and he does not own securities in the companies he covers.