An In-Depth Backgrounder


Strategic Move to Leave Tobacco-Stained Image Behind

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CHICAGO ( -- Welcome to the land of Altria, "where people and performance make a difference."

It sounds like the prologue to a fairy tale, but Altria

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is neither fiction nor fantasy. The kingdom faces its share of foes and battles, and this week votes to adopt a new identity, crown a new king and anoint a new court.

To some, the Altria Group is simply a new name for an old empire: Philip Morris Cos. But Altria could end up an entirely new place. Observers anticipate change ahead for the $90 billion behemoth, including perhaps a formal split of tobacco and food operations, a major acquisition in international food, the impending sale of its beer business and a substantial push for tobacco regulation in the U.S.

Once-humble tobacco shop
A century after the once-humble tobacco shop opened its door on this side of the Atlantic, Philip Morris is closing one chapter. After seven years, Chairman-CEO Geoffrey Bible on April 25 will transfer power to former Chief Financial Officer Louis Camilleri, who will become president-CEO pending approval of the board. On the same day shareholders are expected to approve the name change at the company's annual meeting.

Mr. Camilleri ascends to one of the most coveted, controversial and challenging chief executive roles in the world. He will preside over a global tobacco, food and beer giant that has blue chip, market-moving status. That's despite the fact that it is now most closely associated with a product that is severely limited in advertising and under fire in the courts and in the public health arena.

Altria's future, like its recent past, will be one of finesse rather than simply management and marketing muscle. Mr. Camilleri learned much from Mr. Bible, a veteran tobacco executive who adeptly orchestrated the seminal events of his tenure, such as the $19 billion acquisition of Nabisco, the $8.7 billion initial public offering of Kraft and the $206 billion Master Settlement Agreement between Big Tobacco and the states' attorneys general.

Multinational executive
Company watchers

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say Mr. Camilleri, who becomes Philip Morris' youngest leader at 47, could be just the right mix of multinational executive, diplomat and number-cruncher to do the job. Who better to lead this London-born tobacco shop into its next global era than the Egyptian-born, English- and Swiss-educated Mr. Camilleri, a Marlboro Lights smoker who spent more than half of his life at Philip Morris, mainly in international operations?

"He's very involved politically. He has relationships with state and federal governments, as well as governments around the world, and that's going to become more and more important," said Bonnie Herzog, a former analyst at Credit Suisse First Boston who has since moved to Salomon Smith Barney. CSFB was an underwriter on Kraft's public offering, although Ms. Herzog covers only the tobacco portion of the business.

Mr. Camilleri declined an interview. But the management team he put in place illustrates the future direction of the company, which is consistently curt regarding future plans and rumors, including the sale of its flagging beer business and the possibility of a further separation of its cigarette and food operations.

Tell-tale appointments
Prophetic executive appointments include the promotion of Michael Szymanczyk to the new post of chairman of domestic tobacco unit Philip Morris USA, from president-CEO of

As the successor to Philip Morris, Altria will market cigarette brands including:
  • Marlboro
  • Virginia Slims
  • Benson & Hedges
  • Merit
  • Parliament
  • Alpine
  • Basic
  • Cambridge
  • Bristol
  • Bucks
  • Chesterfield
  • Collector's Choice
  • Commander
  • English Ovals
  • Lark
  • L&M
  • Saratoga
  • Superslims

the unit. Mr. Szymanczyk, a fast-rising executive at the company, will focus on the division's long-term strategies, including advocating federal regulation and developing and marketing reduced-risk cigarettes.

The appointment of former vice president of finance and treasurer Nancy De Lisi to the new position of senior vice president of mergers and acquisitions underscores the company's focus on growth-by-purchase. Industry-watchers believe acquisitions will be a key objective for the company's food business.

"If anything, this gives some insight into how the company is going to look five years from now. It's going to grow through acquisition, and it's going to be involved in some sort of regulatory framework in the U.S.," said Prudential Securities analyst Rob Campagnino, who deems regulation "the defining characteristic of the first part of [Mr. Camilleri's] tenure."

Philip Morris Cos. has been on a mission for at least a decade to position itself as a global package-goods company, not merely a seller of smokes or a champion of cheese. Discussions of changing the corporate moniker are not new. One internal Philip Morris document unearthed during tobacco-industry litigation proceedings, titled "Top Secret. Operation Rainmaker" and dated March 20, 1990, addresses the company's need to improve its public image. "We must immediately change the name of either Philip Morris USA or PM Companies," the document says.

A separate document, prepared by public relations agency Hill & Knowlton to outline its client's corporate affairs strategy for 1993, reads: "The identity and image of the principal corporate brand -- Philip Morris -- is weak compared with other major U.S. companies but can be strengthened dramatically if audiences are told about the company's diverse product line and other corporate attributes."

"Look back in their own records and their own documents. Part of the reason they decided to change the name and address moral issues is because of [the image] the tobacco industry conglomerate was casting over the other [units]," said Jeffrey Wigand, former vice president of research and development for British American Tobacco's Brown & Williamson Tobacco Corp. Mr. Wigand became the industry's best-known whistleblower when he was portrayed in the film The Insider. He now works to educate children about tobacco through the nonprofit organization he founded, Smoke-Free Kids.

Philip Morris acknowledges a name change has been a long-standing possibility. "It's been discussed back and forth. It was specifically discussed in 1993 and they decided not to do it," said Jay Poole, VP-corporate communications at Philip Morris Management Corp.

Clarifying corporate identity
Philip Morris denies the corporate name-change signifies a move to distance the parent from its tobacco unit. "Nothing could be further from the truth. Philip Morris USA and Philip Morris International are two terrific operating companies," Mr. Poole said. "Changing the name and combining that with Louis Camilleri's ascension to CEO presents an opportunity to create some clarity around the corporate entity."

Even clearer, though, is the conglomerate's balance sheet, which shows that despite food's increased contribution to the bottom line, cigarettes' high margins still drive profit.

"Tobacco is a better business than food. It has higher margins; it's more global, and it's more of an oligopoly," said David Adelman, an analyst at Morgan Stanley Dean Witter. "The business is more profitable today than it ever has been, and I think it will be substantially more profitable in five years than it is today."

Analysts predict 6% to 7% annual income growth for domestic tobacco and 10% to 12% internationally, and 8% to 10% growth for food globally.

'Serious market for tobacco'
"Even though we've reached the level of approximately one in four [Americans who are] smokers, and even though there's reason to anticipate the number of American smokers will continue to decline in the next two decades, there is still a very serious market for tobacco in the U.S. and apparently a highly profitable one," said Allan Brandt, a Harvard University medical-history professor who is writing a book on the history of tobacco use in the U.S.

But Philip Morris, after a decades-long drive toward diversification, is at a crossroads.

"One of the strategies of the tobacco industry in the 1970s and '80s was diversification. Get into a lot of different things and protect your tobacco interest by saying 'We don't just produce tobacco, we produce all kinds of socially desirable products,'" Mr. Brandt said. "The industry is in a period of re-evaluation. Do you diversify and put tobacco into a range of different products or do you try to separate it out? Where you place it and how you maintain public image ... is partly a marketing strategy that they're trying to resolve."

Most company observers believe a further separation of Philip Morris' food and tobacco businesses is likely after the sale of Miller. Once Miller's time is up, the company could focus on splitting its remaining units. "Today Philip Morris is valued at a lower price than it would be if its businesses were separated," said Mr. Adelman, who anticipates a separation within the next five years.

For Philip Morris, long devoted to paying high dividends and increasing shareholder value, that's a driving force. "It will certainly help Philip Morris' valuations to exit its non- tobacco assets," Mr. Adelman said. He added that the company's global peers, R.J. Reynolds Tobacco Holdings and British American Tobacco, have advantageously shed their non-cigarette businesses. Mr. Adelman's firm was an underwriter on the Kraft public offering.

Split previously rejected
Philip Morris would not comment on a possible split. An earlier shareholder proposal to spin off the tobacco business was rejected by 96.4% of shareholders.

John McMillin, a food analyst at Prudential Securities, thinks Philip Morris may choose not to mess with success. "Often in conglomerates, divisions are ignored, but [Kraft] is a division that really thrived under Philip Morris in the 1990s," Mr. McMillin said. "I don't know why you'd want to change that in the next decade."

Most industry watchers think both the food and tobacco businesses will grow via acquisition abroad. But prospects are better for Kraft, because there are more food companies for sale.

"To go up to that next level, to get into that next peer group of Coke, Gillette, Procter, PepsiCo, they need to have a better international platform," Mr. McMillin said. In the short-term, Kraft is comfortable doing niche deals, "but when you get to a certain size a mega-deal might help the company," Mr. McMillin added. "I think the one they're hoping for is [Groupe] Danone," which owns such brands as Dannon yogurt and Evian water.

A spokeswoman for Dannon Co. in the U.S. declined to comment.

It is through such an acquisition that Mr. Campagnino believes Philip Morris could achieve its separation of food and tobacco. "I think it's unlikely that they would just offer Kraft shares to the public and spin it off that way," he said, "but they could do an international food acquisition using Kraft's stock as currency, which would dilute Philip Morris' control."

A Kraft spokeswoman said only that the company will continue to make "tack-on" acquisitions that help build the company's presence in new or existing growth categories or that help develop valuable trademarks, among other criteria.

Mastery of marketing
What Philip Morris seems to do well -- despite the adversarial environment in which it works -- is marketing, and many industry watchers believe the name change exemplifies the company's mastery of and agility in the marketing domain.

"Are these guys great marketers?" said Craig O'Keefe, CEO of Interpublic Group of Cos.' Marketing Drive, Chicago, who worked on cigarette brands in the '80s and '90s at Y&R Advertising and Leo Burnett Co. "Yes, quite frankly, they're some of the best."

That marketing savvy comes from their ability to anticipate change, said Mr. O'Keefe, who added that Philip Morris always practiced "futures management -- creating possible scenarios and solutions to those scenarios," which is what company executives seem to be doing now.

"They're creating an incredibly clean holding company," Mr. O'Keefe said. "When you say this new name, you're no longer saying tobacco. It's got to help the stock; it's got to help the image base."

Although the tagline "Altria -- where people and performance make a difference" echoes the company's previous corporate-image campaign tagged "Working to make a difference. The people of Philip Morris," the Altria line will be used as an internal mission statement.

"I don't think it will be as externally focused as the tagline we used in our branding and advertising campaign," Mr. Poole said. "I don't think we've made any decisions yet on how we want to characterize Altria Group going forward," he added. "We're kind of in a new place."

430,000 smoking deaths
No matter how Philip Morris chooses to position it, the public will likely be unforgiving. Each year, 430,000 people die in this country from smoking, and Philip Morris owns just more than half of the market, said Mr. Wigand. "They spend more money telling you what good they do than on the actual good they're doing."

But with $90 billion in sales, Philip Morris -- or Altria -- has to be good at something.

Staff writers Hillary Chura and Stephanie Thompson contributed to this report.

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