Altria and Philip Morris Consider Reuniting to Face Post-Cigarette Future
Signage is displayed outside the Phillip Morris USA Inc. production facility in Richmond, Virginia U.S. (Photographer: Luke Sharrett/Bloomberg)

Altria and Philip Morris Consider Reuniting to Face Post-Cigarette Future

(Bloomberg) -- Tobacco is on the verge of its biggest-ever deal, and it’s not about cigarettes.

More than 10 years after splitting their operations, the world’s two largest tobacco companies, Philip Morris International Inc. and Altria Group Inc., are in advanced talks about reuniting in a blockbuster deal that would be the largest since AT&T Inc.’s bid for Time Warner in 2016.

So why get back together after a 2008 divorce that came amid investor pressure on Altria, the maker of Marlboro cigarettes, to spin off its international business so the unit could focus on faster-growing overseas markets? The world has changed a lot in that time and the companies have been on different paths.

Altria and Philip Morris Consider Reuniting to Face Post-Cigarette Future

Altria Chief Executive Officer Howard Willard, who took the reins in May 2018, has put his stamp on the company, spending almost $15 billion in recent months to acquire stakes in prominent vaping and cannabis companies. It was the latest attempt by the cigarette maker, which still holds a 10% stake in beer giant AB-Inbev, to push itself into faster-growing businesses.

Philip Morris, overseen by CEO Andre Calantzopoulos since 2013, has mostly been focused on IQOS, spending billions to develop the heat-not-burn smoking technology that was only recently approved for sale in the U.S.

Makes Sense

Those divergent strategies are a big part of the reason why a potential acquisition makes sense for Philip Morris, according to Ken Shea, an analyst at Bloomberg Intelligence.

Until now, Calantzopoulos has been adamant that the company would stay away from legal weed, noting the regulatory risks. A deal with Altria would push the company into marijuana and give it a bigger presence in the vaping world, which is exploding.

The global vaping market reached almost $28 billion last year and is forecast to surpass $75 billion by 2023, according to Euromonitor. And the legal U.S. cannabis market had more than $10 billion in sales last year and is forecast to grow to $30 billion in 2024, according to BDS Analytics.

Altria’s tobacco business, which still drives the lion’s share of the company’s profits, has been hit hard by the smoking decline in the U.S., giving the company more reason to entertain a deal.

‘Bad Hand’

“They were dealt a bad hand by the geographic split,” Shea said. “They’re really hamstrung in the U.S.”

The tobacco giants acknowledged they were in talks on Tuesday, but declined to comment further. Philip Morris would own about 58% of the new combined company, and the deal would be based on Altria’s market value at the end of last week, when it closed trading in New York worth about $87 billion, according to a person familiar with the matter.

Annual savings in the potential tie-up could be as high as $1 billion, the person said. The companies are considering a no-premium deal based on closing share prices on Aug. 23, would aim to close the transaction within six months and expect no divestitures, the person said.

The potential deal spooked investors of both companies. Altria initially surged when the talks were announced, but gave up the gain and finished the day down 4%. Philip Morris fell 7.8%, the most since April 2018.

When the two companies split, tobacco makers were under the gun in the U.S., facing lawsuits and investigations that investors argued were hampering the business. While some of that pressure has eased, regulatory headwinds are still prominent for the industry, with the U.S. Food and Drug Administration targets nicotine levels in cigarettes and banning menthol.

“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 U.S. market and its weakening growth profile,“ Chris Growe, an analyst at Stifel, said in a research note.

Vaping, Pot

To offset the impact of declining smoking rates in the U.S., Altria invested $12.8 billion in December for a 35% stake in e-cigarette upstart Juul Labs Inc., which dominates the country’s vaping market. Earlier that month, it announced an investment in Cronos Group Inc., a Canadian marijuana producer. The legal cannabis market is ballooning worldwide as more U.S. states join countries around the world in easing long-held marijuana restrictions.

Altria and Philip Morris Consider Reuniting to Face Post-Cigarette Future

With Juul, analysts said that Philip Morris could see an opportunity to expand the products overseas, where the San Francisco-based company has a limited presence at the moment.

Even vaping, which is pitched as healthier than smoking, is under scrutiny as regulators examine whether products made by Juul and other companies have introduced a new generation to tobacco products, even as traditional cigarette smoking rates drop. There was a death that may have been linked to vaping recently in Illinois and health officials are investigating scores of mysterious sicknesses.

More Efficient

Still, Altria is likely betting that the negative headlines on Juul will pass and that ultimately regulators will embrace the products as a safer alternative to cigarettes, Shea said.

Philip Morris, meanwhile, has found IQOS is resonating in markets like South Korea and Japan. The device was only recently approved for sale in the U.S., where Altria holds the rights to market it.

According to Ryan Tomkins, an analyst at Jefferies, “value creation from IQOS in the U.S. would become more efficient under one ownership.”

©2019 Bloomberg L.P.

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