Tobacco giants’ $200bn tie-up fails to light up the markets
Philip Morris-altria deal would create a titan, but we’ve been here before, reports Michael O’dwyer
Falling income. Hankering after faded glory days. An effort to stay relevant amid changing trends. In the music industry, getting a band’s original line-up back together is one of the oldest tricks in the book but often says more about the lack of fresh ideas than a promise of new success.
So it may prove for two of the big beasts of the near-$900bn (£735bn) cigarette industry, which this week revealed plans for an altogether different type of reunion. Philip Morris International (PMI) and Altria – the international and US makers of Marlboro cigarettes, respectively – said they are exploring a merger little more than a decade after splitting.
The pair hope to shield themselves from regulatory and litigation risks in the US. A deal would create a tobacco titan worth about $200bn with sales of almost $1bn a week. It would consolidate PMI’S position as the world’s second-largest cigarette maker by market share by combining it with the sixth biggest, according to data from Euromonitor International. But the deal is hardly risk-free.
Given the New York-listed companies’ shared history, and the case made for their separation a decade ago, the deal’s detractors have a ready-made arsenal of arguments against the tie-up. “A reunification is a pretty huge call,” says Eamonn Ferry, analyst at Exane BNP Paribas.
Details are so far in short supply. The pair announced only that they are in talks over “a potential all-stock, merger of equals”, though multiple reports state that PMI shareholders will be somewhat more equal, getting about 58pc of the shares in the combined group. The companies offer
no assurances that a deal will take place, though having voluntarily blown their cover may well be confident of thrashing out terms. “It is rare for transactions to fail after companies start formal talks”, says Adam Spielman, an analyst at Citi.
Certainly, consolidation in the sector has been on the cards for some time. British American Tobacco, the FTSE 100 maker of Dunhill and Lucky Strike, and Reynolds, which makes Camel and Pall Mall, sealed a $49bn deal in 2017. Faced with declining sales in mature markets such as the US, “Big Tobacco” has scrambled for alternative money spinners.
A merger would allow PMI and Altria to share the expense of developing and marketing new products as the industry shifts to alternatives that are potentially less harmful. These include vaping and heated tobacco products, which, unlike cigarettes, do not burn.
In addition to possible cost savings, a deal would give PMI and Altria exposure to each other’s portfolio of cigarette alternatives. The former has a strong position in the heated tobacco market through its ownership of IQOS “heatsticks” that are available in markets such as the UK, France and Germany.
Altria, meanwhile, has ploughed almost $2bn into Canadian cannabis outfit Cronos to capitalise on a wave of regulatory relaxation. It is a market that PMI has so far eschewed. Altria’s stable also includes a 35pc stake in leading e-cigarette maker Juul.
Together PMI and Altria would pool the risk of potential bans or regulatory restrictions on some of their new lines, reducing uncertainty for their investors. But for PMI, in particular, sharing risk with Altria may not be altogether comforting.
In acquiring Altria’s $13bn stake in Juul, it would become exposed to a company that Ferry argues makes “little profit” and “may not even exist next year”. Juul is waiting to receive retrospective approval from the US Food and Drug Administration (FDA), which could crack down on the company in a bid to snuff out vaping by teenagers. The non-compete restrictions in Altria’s deal with Juul, which reportedly preclude the former from selling other e-cigarettes, are another potential stumbling block. Would PMI’S IQOS fall foul of this stipulation? Then there are the internal risks. Can meaningful efficiencies be gained from two businesses with no geographic crossover? And while the move is being billed as a merger of equals, reaching a compromise on folding two management teams into one “would certainly make for interesting times”, says Ferry.
Many of the factors that prompted the 2008 break-up appear to remain in play. The parting allowed PMI to focus on international sales while Altria concentrated on the US, where regulation is far tighter, lawsuits are more common and there is acute awareness of the consequences of smoking.
News of the possible reunion failed to light up the New York Stock Exchange. Altria fell 4pc on Tuesday while PMI shed almost 8pc. “We haven’t spoken to one [PMI] shareholder who supports it,” say analysts at Citi.
While both stocks regained some ground yesterday, weary investors could pose a problem for management given approval of shareholders in both companies is required. The deal could be stubbed out before it has even caught on.
‘We haven’t spoken to one Philip Morris shareholder who supports it’