Will Altria sell its stake in SABMiller? New deal speculation
Altria Group is the parent company of Philip Morris USA, the largest U.S. tobacco company, and of the smokeless tobacco and wine manufacturer UST. The company formerly owned Miller Brewing, Kraft Foods and Philip Morris International, which housed its international tobacco business. Although considered a “sin stock”, the company is known for its high dividend pay-out, averaging at about 80 percent of profits.
In April 2014, the Motley Fool, a website for investors, wondered what will become of Altria’s near 30 percent stake in SABMiller. Will they sell it eventually or keep it? The Fool’s - unsurprising - answer is: No, they won’t sell it but they might expand their beverages holdings and buy a company like Constellation Brands (the drinks company which owns the Corona beer business in the United States).
Here’s what the Fool said: “What many investors fail to realise is the fact that Altria's holding in SABMiller is actually one of the fastest growing parts of the group. Specifically, since 2008 Altria's annual income from its share of SABMiller has jumped from USD 467 million to USD 991 million (EUR 717 million) as reported during 2013. This is a compounded annual growth rate of 16.2 percent. In comparison, Altria's income from “smokeable” products has grown at a compounded annual growth rate of 4.2 percent.”
Altria's initial investment in SABMiller was USD 6.5 billion.
Today, it’s worth significantly more. In London, where SABMiller has its primary stock market listing, SABMiller has a market capitalisation of approximately GBP 45 billion, or USD 75 billion. As Altria holds a 27.1 percent stake in SABMiller, that values its stake at about USD 22 billion.
Is Altria likely to sell? The Fool says “no” because the company's management has previously answered this question by stating that the tax on realized gains would mitigate much of the capital gain from the sale. Because if Altria sold its stake in SABMiller for a price far in excess of book value, it would have to pay 33 percent federal and 6 percent state taxes on the gain. Nevertheless, the Fool thinks a tax-efficient spin-off would be a possibility.
On the other hand, the Fool also rules out a takeover of SABMiller by Altria. “With a market capitalization of GBP 45.5 billion (USD 75 billion) a complete takeover of SABMiller by Altria is unlikely as the share Altria does not own would cost an additional USD 53.2 billion, while Altria's own market capitalisation is only USD 75 billion.”
However, the Fool thinks that further diversification by Altria into the beverage sector would suit Altria well. It considers Constellation Brands an ideal fit. “Constellation has a market capitalization of just around USD 15 billion, which is a much more suitable acquisition size for Altria”, the Fool argues.
“Altria could make a swoop on Constellation now, as Constellation has just started to turn itself around after years of stagnant earnings. This growth is a result of Constellation's acquisition of Grupo Modelo's U.S. beer business from AB-InBev for nearly USD 5 billion [in 2013].
Constellation is not just about beer. Constellation's wine division would make yet another addition to Altria. Altria already owns the Ste. Michelle wine company, which contributed USD 609 million to the company's sales for fiscal 2013.
The Fool summarises that Altria's share in SABMiller has become a major income stream for Altria during the past few years. “As a result, Altria is unlikely to sell the holding and investors can rest safe in the knowledge that an ever increasing portion of Altria's income is coming from alcohol, a product with a more sustainable outlook than Altria's traditional cigarette offering.”
What the Fool forgot to mention was that its speculation rests on the fact that SABMiller’s own business keeps on growing as nicely as it has done over the past years.
