NEW YORK (CNN/Money) -
Altria stock jumped Thursday after Chairman and CEO Louis Camilleri told investors the company is preparing to split up into two or three different companies.
"We are looking at a number of alternatives to maximize shareholder value, including the separation of the company into two, or potentially three, strong and independent entities," Camilleri told analysts and investors at a financial conference in New York City, according to a transcript of his speech.
"Although the precise timing and chronology of events remain uncertain, I can assure you that we are working on a myriad of activities in anticipation of a potential breakup," he added.
Altria (up $4.23 to $54.23, Research), one of the 30 stocks in the Dow and owner of Kraft Foods and Philip Morris, jumped 8.9 percent in afternoon trading on the New York Stock Exchange.
Company spokesman Timothy Kellogg would not provide further details or comment on which units would be affected by a possible spin-off.
Focus on tobacco
But Camilleri made it clear that once lawsuit hurdles are cleared, the company hopes to realize the full value of its tobacco business.
"Looking at Altria's price-to-earnings multiple excluding Kraft, you can see that our tobacco businesses are significantly undervalued versus their tobacco peers," Camilleri said at the conference.
Marc Greenberg, a Deutsche Bank analyst who covers Altria, said the company might split off the rest of Kraft as it shifts its focus to tobacco. Analysts have also said the company could split up its U.S. and international tobacco businesses.
"Kraft is the most obvious spin, because its price is known," he said, adding that once Kraft is gone, Altria's value would increase, because it would become predominantly a tobacco company.
"(The company) ex-Kraft currently trades at a 25 percent to 30 percent discount to comparable tobacco companies, even though it carries the same risk as all tobacco companies carry," he said.
Greenberg said his target for the stock, after a full Kraft spin-off, would be $65. The stock stood at about $54.40 late Thursday.
Altria has already split off part of Kraft Foods, selling about 16 percent of the company to investors in June 2001. Altria Group Inc. owns the other 84 percent or so of Kraft, with stock giving Altria 97 percent of Kraft's voting power.
The market value for 85 percent of Kraft is about $45 billion, which would sharply increase the available amount of food company stock in the marketplace, Tim Ramey, a food industry analyst with D.A. Davidson, told Reuters.
"From a supply and demand standpoint, there is going to be some rough sledding for a while," Ramey, who rates the stock "underperform," told the news agency.
"But having said that, it probably is a good thing to have an independent Kraft, though there won't be that many changes. Perhaps their tax rate will be lower," Ramey said.
Kraft (Research), which has seen business falter as consumers shy away from snack foods like Oreo cookies, rose 2.7 percent in late trading. The company plans to close up to 20 plants and eliminate about 6,000 positions, or about 6 percent of its work force, Camilleri said, reiterating a January 2004 news report saying the company planned to restructure and cut jobs.
Better legal environment
In his speech, Camilleri stressed that the company needs to see "continuing improvements in the litigation environment" before the board will consider further spin-offs.
"The timing of the announcement comes with the beginning of the second Bush term, and I think that gives it more octane than if it happened in a vacuum," said Greenberg, who added that Bush's policies for business, including tort reform, would likely create a better environment for the tobacco industry.
The Florida Supreme Court heard arguments Wednesday about whether it should reinstate a $145 billion class action verdict against the company and other cigarette makers that was overturned by an appeals court.
The company is also part of a major suit in Washington brought by the Department of Justice. The Illinois Supreme Court will hear arguments next week in a "light cigarette" case involving a $10.1 billion verdict against Philip Morris USA.
Kraft was acquired in 1988 for about $13 billion by the company then called Philip Morris. The business was combined with General Foods, which Philip Morris bought in 1985 and then later with Nabisco, which was bought in 1990. Shareholders voted in 2002 to change the company's name from Philip Morris Companies Inc. to Altria Group, Inc.
Some have speculated that acquiring food companies and changing its name was a way for Altria to distance itself from tobacco.
"It isn't," the company writes on its Web site. "Altria Group takes pride in owning what we believe to be the two premier tobacco companies in the world -- each of which is retaining its 'Philip Morris' name."
Altria also reaffirmed its previously disclosed earnings guidance of $4.55 to $4.60 a share for the full year, with Camilleri saying he believed the company would achieve the high end of that range.
-- Reuters contributed to this story
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