Altria to Buy Black & Mild Cigar Maker

By John Reid Blackwell, Richmond Times-Dispatch, Va.

Nov. 2–The next big step for the nation’s top cigarette company is cigars.

Altria Group Inc., the parent company of Philip Morris USA, is adding a cigar maker to its U.S. holdings as it prepares to spin off its international cigarette business.

The company said yesterday that it plans to acquire Pennsylvania-based John Middleton Inc., a leading maker of mass-market cigars, including Black & Mild. The deal, expected to close by the end of the year, would put Altria into a growing segment of the U.S. tobacco business as cigarette consumption declines.

The $2.9 billion acquisition "fits squarely with our announced strategy to grow our U.S. tobacco business beyond cigarettes and complements our recent initiatives in the smokeless category," Michael E. Szymanczyk, chairman and chief executive officer of Philip Morris USA, said in a statement.

Szymanczyk will become the top executive of Altria Group Inc. when the tobacco giant completes its planned spinoff of its international cigarette business next year. Altria plans to move its headquarters from New York City to the Richmond area.

The spinoff will separate Henrico County-based Philip Morris USA from its sister company, Philip Morris International, which is growing in overseas markets. Philip Morris USA controls half of the U.S. cigarette market, but consumption is declining about 1 percent to 2 percent a year. To expand its business, it already has made forays outside the cigarette business by test marketing several smokeless tobacco products.

With the Middleton acquisition, "Now they have a good toehold in the cigar market, as well as some other pipe tobacco and smoking tobacco markets," said Darryl Jayson, vice president of the Tobacco Merchants Association, a trade group in Princeton, N.J.

John Middleton Inc., which also makes Prince Albert smoking tobacco, will keep its name and operate as a subsidiary of Altria Group. The company has about 550 employees, most of them working at plants that will remain open in Limerick and King of Prussia, Pa., Altria said.

"The plan is for Philip Morris USA to contribute resources," such as distribution and marketing, to the John Middleton business, said Brendan McCormick, a spokesman for Philip Morris.

Analysts reacted positively to the news, although shares fell $1.05 to $71.88 on a down day on the markets.

"We believe that the global cigar market is underdeveloped and this could be a way for Philip Morris USA to generate sales/volume internationally once it is separated without competing directly with Philip Morris International," Citigroup Analyst Bonnie Herzog wrote in a research note. Foreign sales are only a small part of Middleton’s business now, an Altria spokesman said.

Like its largest U.S. competitor, Reynolds American Inc., "Altria is clearly evolving to become more of a tobacco — rather than just a cigarette — company," Morgan Stanley analyst David Adelman wrote in a research note. John Middleton’s cigar business will provide a growing stream of income to Altria’s "very mature" domestic cigarette business, he said.

Matthew Myers, president of the Campaign for Tobacco-Free Kids, said Middleton’s brands include some flavored cigars, such as cherry and vanilla, which could be prohibited if Congress passes proposed legislation giving the Food and Drug Administration authority to regulate tobacco products.

Before the FDA acts, "Philip Morris should make a commitment to withdraw those products with flavors that they have agreed should not be in tobacco products because they appeal to youth," Myers said. Philip Morris USA is supporting FDA regulation of the tobacco industry.

McCormick, the Philip Morris spokesman, said flavorings historically have been a more accepted element of cigar and pipe tobacco products than cigarettes. But he said it is too early to speculate on what changes Altria might make to the brands. Contact John Reid Blackwell at (804) 775-8123 or jblackwell@timesdispatch.com.

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