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Altria Group Inc. (NYSE:MO) announced it will spin off its wholly owned cigarette company Philip Morris. This is the same company that spun off Kraft Foods (KFT) last year. Is Altria spinning out of control?

Hardly. In fact, it's getting more in control, of its operations and its identity. One of the problems Altria Group (formerly Philip Morris Inc.) has always had is that it is a conglomerate. Wall Street doesn't know exactly how to value a large company with many different operating entities because each subsidiary is competing in a different industry. The conglomerate is a hybrid that is running on several different fuels so what is it really worth? Getting full value for each operating group is hard because its results are hampered (or helped) by results from other operating groups held by the parent. By spinning off Kraft and now Philip Morris, Altria is getting more identifiable. The subsidiaries will also gain by being able to trade on their own merits, away from any influence of sister subs.

The second benefit of spinning off Philip Morris to its subsidiary Philip Morris International will be to remove the cloud of legal smoke that hangs over the parent, a cloud created by lawsuits and U.S. regulations. The new Philip Morris International will reside in Switzerland and live under Swiss laws, unhindered by stricter American legal issues. The goal is to blanket the world with cigarette and other tobacco products. Exact timing of the spin off will be announce on January 30. Most observers have been expecting this for some time and believe the transaction will occur shortly after the beginning of the year.

Here's how large Philip Morris International is. Last year it produced 831.4 billion cigarettes, more than 4 times what the American unit produced at 183 billion cigarettes. Revenues for the international unit were $48.26 billion while the U.S. Philip Morris made $18.47 billion.

Once this deal is complete, Altria Group will stand alone, able to use its cash flow to reward shareholders in the form of a higher dividend or a share buyback, buy other companies, or pour more resources into research and development. It should also have a higher valuation as legal issues blow away, like a cloud of smoke.

Disclosure: none

Source: Altria Group: Spinning Off Philip Morris to Focus on Itself