Several large shareholders of Philip Morris Cos. Inc. agree with management that the company's food and tobacco business shouldn't be split.
Yet these same investors are still seething over the company's persistent refusal to let outside directors discuss long-term strategy with them.
The $80 billion California Public Employees' Retirement System, Sacramento, which owns 5.4 million shares of Philip Morris, plans to vote with management in opposing a shareholder proposal requesting the company split its businesses.
But the nation's largest public pension fund also plans to vote against management's nominees for director slots at the company's April 27 shareholder meeting "as a way of sending a message that we are still dissatisfied they have not come to a meeting with the (outside) directors," said Richard Koppes, general counsel.
Staff at the California fund wrote and talked to Philip Morris officials about wanting to meet with outside directors to discuss the company's plans, he said.
The giant pension fund is part of a group of investors, mostly members of the Washington-based Council of Institutional Investors, that had last summer requested a meeting with the company's non-employee directors after the company abruptly tabled a proposal to split the two operations.
At a meeting with Philip Morris officials, arranged with the help of the Council of Institutional Investors and held in September, some investors walked out after a company spokesman apparently said outside directors had not been invited (Pensions & Investments, Oct. 17).
The company does not feel any further meetings with outside directors is warranted, according to a statement issued late last week.
"Philip Morris takes very seriously the importance of open dialogue between the company and its stockholders," the statement said, adding some of the outside directors did attend the September meeting with institutional shareholders. The company's statement noted California system officials had attended that meeting and were able to ask questions of both management and directors. "Philip Morris believes that it has addressed the questions raised," the statement said.
The company also said its businesses are performing well, noting per share earnings for 1994 were up 19% from 1993; its dividend was increased 27% last year; its $6 billion stock buyback program is in place; and the company's stock has risen 13.2% since the Sept. 21 meeting with institutional investors. The company also noted it has redeemed its poison pill.
The International Brotherhood of Teamsters, Washington, which also wants to meet with the company's outside directors, expects to cast a vote of no confidence in the company's directors, said William Patterson, director of corporate affairs. The Teamsters originally had led the call to meet with the company's directors last year.
"The concerns that were alive earlier are still there. Funds and individual investors have long-term concerns about the responsiveness of directors, especially outside directors," in discussing the company's strategic plan, and efforts to get rid of the potential liability from the tobacco business, Mr. Patterson said.
But the Teamsters are breaking with other pension funds and voting in favor of the spinoff proposal.
"There's no question funds are going to express their concerns with this company in different ways. I would be surprised if they are in lock step on how they do that. Funds have their own perspective, their own procedures for making their voice heard," he noted.
Bart Naylor, national coordinator for corporate affairs at the Teamsters' Washington office, said while the Teamsters appreciate the complexity of the legal issues surrounding a spinoff of the tobacco operations, the union still feels it would be in the shareholders' best interest.
The Teamsters hold a total of 2.1 million Philip Morris shares through 25 pension funds including the national pension fund.
Philip Morris itself had opened the subject of a split last April by announcing it was contemplating such a move. The company subsequently reversed its position.
The $35 billion State of Wisconsin Investment Board, Madison, also opposes the spinoff proposal, said Kurt N. Schact, general counsel. The board owned about 1.2 million shares of Philip Morris at the end of December.
"I'm not so sure that two separate entities would be better than one combined," said Steven Hilmer, a director of investments at Wisconsin.
Another large institutional shareholder that owns more than 10 million Philip Morris shares but did not wish to be identified already has cast its shares against the spinoff proposal.
The New York City Employees' Retirement System, which owns 2.6 million shares, has not decided how to cast its votes.
No matter which way it votes, Jon Lukomnik, deputy comptroller of pensions for New York City, said, "Our long-standing request to ask for a meeting with Philip Morris is still outstanding."
Meanwhile, officials at American Express Financial Advisors Inc., Minneapolis, also don't see a spinoff as necessarily the best way for the firm to create shareholder value, said Keith DeVore, senior securities analyst. American Express owned about 3 million shares in the company at the end of last year.
The embattled conglomerate is one of many companies with shareholder requests to separate tobacco from other businesses (P&I, March 6).
Some of the institutional investors who want Philip Morris directors to explain which way the company is headed have expressed concerns that a spinoff may not be the best option for the company to boost its flagging stock price. Some analysts suggest a split could lift the company's stock price and let its food business trade at a higher multiple. But some shareholders worry a split may not help Philip Morris insulate itself from litigation and, in fact, could invite lawsuits from angry bondholders and tobacco plaintiffs trying to stop such a split.
The influential Institutional Shareholder Services Inc., Bethesda, Md., which advises most of the nation's leading activist shareholders, recently advised investors to vote against a spinoff.
"Some of the proponents that have presented these proposals seem to think that there will be an automatic protection from litigation that is ongoing simply by effecting a spinoff transaction, and that is not a certainty," said David Drake, the ISS analyst who recommended shareholders vote against the spinoff.
Investors could argue the company intended to defraud them by separating the food business from the riskier tobacco operations.
Religious investors, who had attempted to get a similar proposal on the company's ballot, are likely to throw their support behind the spinoff, said Tim Smith, executive director of the Interfaith Center of Corporate Responsibility, New York.