Altria puts Kraft spinoff plans on hold

Virginia Business
October 2006

Kraft Foods and Richmond-based Philip Morris USA will have to stay married for a little while longer. Analysts had expected a decision in a 7-year-old racketeering lawsuit brought by the U.S. Justice Department against eight tobacco companies to be the final hurdle in spinning off the food company from New York-based Altria Group Inc., the parent company of Kraft and Philip Morris. The spinoff strategy, announced two years ago, is designed to remove the “tobacco taint” from Kraft, which is based in Illinois and has a plant in Henrico County.

But the ruling by U.S. District Judge Gladys Kessler didn’t bring the closure everyone was anticipating. Kessler agreed with the plaintiff’s assertion that cigarette makers had violated civil racketeering laws by conspiring to mislead consumers for more than 50 years about the dangers of smoking. While she didn’t punish them financially, she ordered the tobacco companies to stop marketing light, low-tar and mild cigarettes. These products carry what Kessler termed “deceptive brand descriptors which implicitly or explicitly convey to the smoker and potential smoker that they are less hazardous to health than full-flavor cigarettes.”

Philip Morris immediately appealed the ruling, and the Altria board didn’t even address the Kraft spinoff at its August meeting. “I think the federal ruling kind of muddies the waters,” says Greg Warren, an analyst covering the tobacco and food industries for Morningstar Inc. “Everybody was anticipating and believing that if they walked away from this case victorious, the path would be clear for a Kraft spinoff. But technically, they lost the case.”
Still, industry experts are certain that the spinoff will take place. It’s just a question of timing.