Philip Morris-Altria Reunion Divides a Worried Wall Street

(Bloomberg) -- Philip Morris International Inc. shares sank as much as 11% on Tuesday to their lowest since January, a sign that investors are concerned about talks to reunite with Altria Group Inc. more than a decade after their 2008 split.

Some on Wall Street see the deal as better for Altria shareholders than for Philip Morris holders due to regulatory uncertainty in the U.S. Altria gets all of its revenue from the U.S., while Philip Morris gets none.

“I’m not really sure why this is a good idea” with a U.S. regulatory environment that has become “a lot more difficult to predict,” said Brian Barish, president and chief investment officer of Cambiar Investors, in a phone interview. The firm oversees $15 billion in assets but sold out of Philip Morris late last year.

Investors generally agree that products stand to benefit from global integration and distribution, and that the combined company would have a “stronger and more predictable/stable cash flow profile,” said Wells Fargo analyst Bonnie Herzog, a supporter of the deal.

Timing of any deal or next step was not disclosed, but Barish said he’d be surprised if the Philip Morris board went forward “until there is more clarity” on the regulatory front. This may come in October, when the FDA is expected to provide more clarity on the industry, he said.

Here’s more of what analysts and investors had to say:

Wells Fargo, Bonnie Herzog

  • Sees “significant value creation” for shareholders of both companies
  • Has “long believed” that a combination “would make a lot of sense, especially now given Altria’s stake in Juul & IQOS coming to market shortly in the U.S.”
  • Rates both stocks outperform

Morgan Stanley, Pamela Kaufman

  • Sees “limited strategic rationale for a potential merger” given soft U.S. cigarette fundamentals and regulatory risk; also sees “limited scope” for synergies and “minimal” earnings gains (based on an assumed deal price of $49-$53 per share)
  • With Philip Morris boosting that its goal is to have a “smoke-free world,” increasing its combustibles exposure seems contrary to its strategy
  • Potential merits of deal include: Altria proving Philip Morris with a steady stream of U.S. dollar-denominated earnings and cash flow to offset foreign exchange volatility; Philip Morris getting full control of IQOS in the U.S. and facilitating Juul’s international expansion through its distribution footprint
  • Rates Philip Morris overweight and Altria equal-weight.

Bernstein, Callum Elliott

  • Some merit in a re-merger, but ultimately believes that Altria’s Juul stake “could prove problematic” and remains “unconvinced that Philip Morris would be incentivised to push the product internationally”
  • Philip Morris shares likely face “significant” valuation risks; combined company would be unlikely to trade at Philip Morris’s premium valuation with about 40% of earnings exposed to U.S. regulatory risks and slower growing U.S. market.
  • Rates Philip Morris outperform, price target $99, and rates Altria market perform, price target $53.

What Bloomberg Intelligence says

“We view positively Philip Morris’ announcement that it’s in talks to recombine with Altria in all-stock deal.” “The move has much merit to broaden their combined opportunity to capitalize on growing global demand for noncombustible devices and create an entity better able to exploit legal cannabis market opportunities worldwide.”

-- Kenneth Shea, senior consumer products analyst

-- Click here for the research

Jefferies, Ryan Tomkins

  • While a merger “makes sense and will create a more valuable company when combined, we do think it is strange timing given possible risk to Juul in the U.S. with regards to regulatory action”
  • Little cost synergies besides corporate overheads and leaf buying
  • That said, there could be “sizable” revenue opportunities as the international outlook for Juul improves with the help of Philip Morris’s distribution and sees value creation as IQOS in the U.S. would become more efficient under one ownership
  • Sees greater value for Altria shareholders. He rates Philip Morris and Altria hold.

Gardner Russo & Gardner, Thomas Russo

  • “I’m surprised by the timing and the conversation as are the rest of the market,” Russo said in a telephone interview
  • That said, he sees how a potential combination could benefit both companies
  • Altria is now “a much leaner organization and one in which it’s conceivable that many of the services duplicated by their foreign former brother firm could be share”
  • “Same brands, same brand heritage and hence a shared voice might lead to savings and also increased effectiveness”
  • NOTE: The firm held 9.3 million Phillip Morris shares and almost 5 million Altria shares as of June 30, according to data compiled by Bloomberg

©2019 Bloomberg L.P.

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