Philip Morris Deals Off Beer Unit

Philip Morris Cos. Inc. has hit on a restructuring technique that allows it to snip the umbilical cord with non-core businesses: farm the operations out to somebody else but hang in to reap the rewards of their labors. As a result, Philip Morris over the last two years has changed from a company with operations in cigarettes, food, and beer to a cigarette producer with interests in food and beer. The pattern was established in 2001 when Philip Morris sold a minority interest in Kraft Foods Inc. in an IPO but kept control. It was repeated in late May with the agreement to merge its Miller Brewing Co. subsidiary into London-based South African Breweries PLC (SAB) in a $5.6 billion deal. Under the accord, SAB will pay Philip Morris $3.6 billion worth of stock – good for a 36% interest in the combined company – and assume $2 billion in Miller debt. If the format works, it could become a model for other companies looking to cut off non-core operations without completely exiting them or trying to make a divestiture financially feasible for a buyer. SAB, which operates in Africa, Europe, and Asia, gains a North American stronghold in the globally consolidating beer industry without paying cash, while Philip Morris will be able to wield major influence in the newly combined and renamed SAB Miller PLC with the option of cashing out later. SAB has been criticized by some analysts for overpaying for Miller, the second-largest brewer in the U.S. but considered less than a premier performer by some. However, Justin Jenk, a strategic partner at Accenture Ltd., says that SAB is a careful buyer that has been successful in using acquisitions to expand from its onetime base in South Africa. The company pays a lot of attention to strategy and the best ways to implement it, he says. The deal is “absolutely in sync with their strategy,” he notes. SAB, he adds, does not know the American market but gains Miller’s management team, which fills the experience gap. “They’ve cracked Europe. They’ve cracked Eastern Europe. This is the opportunity for them to reach that next level, which is what they need. I think they have got a better than odds-on chance of doing it.” While it didn’t get any cash, Philip Morris has said that shedding Miller’s debt will free up about $1.7 billion in cash flow that will be earmarked for stepping up stock buybacks this year.