Phillip Morris Buys Rothmans: What's Not to Like?

Includes: PM, RMANF
by: Todd Sullivan

Philip Morris International (NYSE:PM) announced Thursday that the company has entered into an agreement with Rothmans Inc. (OTC:RMANF) to purchase, by way of a tender offer, all of the outstanding common shares of Rothmans. The agreement and related offer have the unanimous support of the Board of Directors of Rothmans.

Rothmans’ sole holding is a 60% interest in Rothmans, Benson & Hedges Inc. (RBH). The remaining 40% interest in RBH is currently owned by PMI and, as a result of this transaction, RBH will become wholly owned by PMI. PMI and Rothmans have been joint shareholders of RBH since 1986.

PMI agreed to make the offer following Rothmans’ and RBH’s finalization of the CAD $550 million settlement, announcedThursday in a separate release issued by Rothmans, with the Government of Canada and all ten provinces. The settlement resolves the Royal Canadian Mounted Police’s investigation relating to products exported from Canada by RBH during the 1989-1996 period. (Read full agreement here.)

So, how will it affect earnings?

As a result of the finalization of the settlement described above, PMI has revised its second quarter 2008 results that were set forth in PMI’s earnings press release issued and furnished to the SEC on Form 8-K (Item 2.02) on July 23, 2008. The revision will record an after-tax, non-cash charge of $124 million. The charge, which will be included in the operating results of the Latin America segment, represents the present value of PMI’s 40% equity interest in RBH’s portion of the settlement (CAD $350 million) and will reduce PMI’s reported second quarter net earnings by $124 million to $1.7 billion. Diluted and basic earnings per share will be revised from $0.86 to $0.80 and from $0.87 to $0.81, respectively, as per the schedules attached to the press release.

PMI anticipates that the transaction will not affect 2008 full-year results and will be modestly accretive to earnings per share in 2009.

Consequently, PMI reaffirms its forecast for 2008 adjusted full-year diluted earnings per share, previously announced on July 23, 2008, projecting growth of approximately 19% to 21% to a range of $3.32 to $3.38 from a 2007 pro-forma adjusted base of $2.79.

What is nice is that a litigation free asset is being purchased that will add to earnings next year and further expands the market. It is really hard to find something not to like here.

Full PM Filing

Disclosure: Long PM