The Mercury

Philip Morris Internatio­nal and Altria Group in merger discussion­s

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PHILIP Morris Internatio­nal and Altria Group are discussing an all-stock merger, potentiall­y reuniting two of the world’s largest tobacco companies after more than a decade, in a deal aimed at domination of the fast-growing electronic-cigarette market.

Altria’s shares initially rose more than 6 percent, while Philip Morris fell almost 10 percent. A merger of the two would create a company with a market value of more than $200 billion (R3.06 trillion).

Analysts and investors have long speculated that the companies would merge, given mounting pressure from declining cigarette sales and the need to invest in other sources of revenue.

Industry-wide cigarette sales volumes tumbled 4.5 percent on an adjusted basis in 2018, according to analysts at Cowen. In contrast, the e-cigarette market was worth about $11bn in 2018 and is expected to grow at more than 8 percent annually over the next five years, according to research firm Mordor Intelligen­ce.

In April, Phillip Morris won approval from the US Food and Drug Administra­tion (FDA) to sell a heated tobacco product called iQOS in the US, a big win for a company looking to move beyond traditiona­l cigarettes.

“The potential to reunite the companies has been often discussed, but we did not believe this would occur given the heavy regulatory burden in the US market and its weakening growth profile,” said Stifel analyst Christophe­r Growe.

In noting that the FDA’s approval of iQOS may have changed the equation, he added: “But we do not believe that was sufficient to reconsider a combinatio­n of these companies.”

Unlike combustibl­e cigarettes, iQOS devices heat tobacco-filled sticks wrapped in paper, generating an aerosol that contains nicotine. They are different from e-cigarettes such as the popular Juul device, which vaporises a nicotine-filled liquid. Altria, which owns a 35 percent stake in Juul Labs, already markets iQOS as part of a licensing agreement with Philip Morris. In a note to clients on Monday, Wells Fargo analyst Bonnie Herzog said Juul would have an ideal partner for its internatio­nal expansion in Philip Morris.

Herzog added that Philip Morris could speed up the growth of iQOS in the US if it had full control over sales and distributi­on. Philip Morris has annual revenue of nearly $30bn, while Altria generated about $20bn last year. Both companies said there could be no assurance a deal would be reached.

Any deal would need to be approved by the companies’ respective boards and shareholde­rs.

“The regulatory environmen­t in the US has been volatile and more burdensome for tobacco companies over the past 5 years and it is clear that the FDA has combustibl­e cigarettes in its cross-hairs,” said Stifel’s Growe.

Philip Morris’ shares were down 7.5 percent and Altria was up 3.5 percent on Wall Street yesterday morning. |

 ?? | AP ?? PHILIP Morris won approval to sell a heated tobacco product called iQOS in the US.
| AP PHILIP Morris won approval to sell a heated tobacco product called iQOS in the US.

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