In a deal that will give it over 1/2 the US machine made cigar market, Altria (MO) has agreed to pay $2.9 billion in cash for cigar maker John Middleton, the maker of Black & Mild.
Volume for this segment of the cigar market for 2007 is estimated at 5.3 billion cigars, according to Altria and they estimate the growth rate for large machine-made cigars was 4 percent annually from 2003 to 2007. This contrasts to the 3% to 4% annual decline in US cigarette market of which Altria’s Marlboro brand holds over 50% market share.
John Middleton’s revenue is expected to reach $360 million in 2007 and operating income to hit about $183 million. Over the 2003 to 2007 period, operating revenues and operating income are estimated to have grown at compound annual rates of approximately 10% and 13%Altria said it expects the deal to close by the end of the year and add to be “modestly accretive” to 2008 earnings while generating an “attractive double-digit economic return.” The real advantage will be the ability to use Altria’s existing distribution and sales network to increase sales and dramatically decrease costs. No figures were put on that though.
This marks the second tobacco growth category Altria has entered full force. Late summer Altria announced they were entering the smokeless market with a Marlboro “chew”. The Middleton purchase was “”being undertaken to enhance our long-term growth momentum in the U.S. market and create shareholder value. The acquisition is both strategically compelling and financially attractive. It fits squarely with our announced strategy to grow our U.S. tobacco business beyond cigarettes and complements our recent initiatives in the smokeless category.” according to Michael Szymanczyk, chief executive of Philip Morris USA.
How can you not like this move? Cash deal, no debt, immediate earnings benefit and a market leader is a growing segment of a highly profitable industry.
