Altria’s luxury problem

What will tobacco firm Altria do with its cash windfall from the SABMiller sale is a question that has irked analysts for some time. As part of its deal with AB-InBev, Altria received a greater-than-expected amount of cash – USD 5.3 billion. Actually, and this is the really juicy bit of info, the tobacco company had to work hard to negotiate an alternative to receiving cash only in exchange for its 27 percent stake in SABMiller stake.

According to the Motley Fool, a website for investors, AB-InBev wanted to pay off Altria and not offer stock.

But receiving cash only would have created a substantial capital gains tax problem for Altria back in the US and so Altria had to negotiate a tax-free exchange of SABMiller stock for AB-InBev stock.

Since other investors were also eligible to AB-InBev’s cash-and-stock offer, Altria ended up with a smaller stake in the enlarged AB-InBev and more cash than originally expected.

The first thing Altria did after the deal was to raise its ownership stake in AB-InBev by using some of the cash – about USD 1.5 billion - to buy shares. It thus boosted its stake from roughly 9.6 percent to 10.2 percent.

Lifting its stake beyond the 10 percent mark will not give Altria a bigger say in AB-InBev. No, it will give Altria certain tax benefits. Controlling slightly over 10 percent in AB-InBev entitles Altria to foreign tax credits for the dividends that AB-InBev will pay it.

The other immediate move that Altria took to use up its cash hoard was to increase the amount of money it dedicated to its stock repurchase programme: from USD 1 billion previously to now USD 3 billion. Those repurchases are expected to take place by mid-2018.

As for further moves, it remains to be seen whether Altria will take any special action, like an extraordinary dividend for shareholders.