A Look at Some "Sinful" Mergers & Acquisitions Activity for Your Portfolio
By Ann Sosnowski, American Capitalist
Here in Baltimore, the smoking ban will take full effect on January 1, 2008. Additionally, the entire state of Maryland is putting the public smoking ban into effect in bars, restaurants and private clubs as of February 1, 2008.
Many businesses here in Baltimore, and in Maryland, are starting early. They figure it’s easier to just implement the changes and get people used to not smoking… and by the time the bans do take official effect, the stench of cigars and cigarettes will be nothing but a memory.
Across the country, smoking bans are becoming commonplace. California, Delaware, New York, Connecticut, Maine, Massachusetts, New Jersey, Rhode Island, Vermont, Ohio, Nevada, Arizona and Washington state have all instituted smoking bans.
(Interestingly enough, a quick perusal of the Red versus Blue political map of these states shows that 11 of the 14 states that have banned smoking are Democratic.)
For a long time, Altria Group (MO:NYSE), whose symbol refers to its better known Phillip Morris International brand, ruled the roost as one of the biggest tobacco companies in the world. It’s the biggest manufacturer of cigarettes in the United States. This year, MO spun off its 88.9% stake in Kraft Brands Inc. (KFT:NYSE), opting not to hide its image, and tobacco sales losses, behind that of a food company.
One has to wonder whether the smoking ban, which will eventually reach from sea to shining sea in America, as well as Altria’s spinoff of KFT, will spell doom for the tobacco giant.
Already for the year, MO has moved from $86.50 per share to $70 per share, a loss of 19% in less than seven months. MO took a 22.3% dip on its biggest price gap down in company history in early April due to the spinoff of KFT
Already, Altria is seeing weakness seep into its books from the KFT spinoff, which can no longer make up for any tobacco sales losses. I anticipate more smokers kicking the habit if they can’t enjoy their pleasure indoors… especially when it’s introduced here on the East Coast during the winter season.
Today, MO posted an 18% loss in second-quarter profit on net income of $2.2 billion, and mentioned that its Philip Morris International division is now ready to be spun off into a separate entity. Interestingly enough, Phillip Morris USA is already seeing a drop in cigarette sales, but Altria’s Lausanne tobacco operation based in Switzerland is seeing increased sales in Europe.
Altria also lowered its full-year guidance from a high of $4.25 per share to a high of $4.10 per share.
While MO is restructuring its business to deal with declining sales in America, European tobacco companies are joining together to deal with increasing sales in Europe… for now. New merger and acquisition activity in the industry reports that Imperial Tobacco (ITY:NYSE) will acquire its European rival Altadis (ALTDF.PK), to branch into mainland Europe after smoking bans have been enacted in Britain. The deal is worth $22.3 billion.
This kind of M&A activity is considered horizontal, where both companies find it necessary to cut costs and consolidate manufacturing and advertising initiatives.
While these “sinful” companies aren’t on my list of good investments currently, British American Tobacco PLC (BTI:NYSE) is positive on all fundamentals, with a current profit margin of 20% and a quarterly earnings growth of 9.50%. Second in market cap only to Altria, BTI has risen 237% since the beginning of 2003 and, according to its technicals, looks apparently healthy for more upside.
If you’re looking for a “naughty” investment for you portfolio, I suggest some due diligence on BTI. It may be a company looking for acquisition activities in the marketplace as well to take advantage of mainland European sales.
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