Last week, tobacco giants Philip Morris International (PMI) and Altria, which originally split from each other in 2008, revealed that they were in “advanced talks” to create a $200bn “blockbuster deal”, say Jennifer Maloney and Cara Lombardo in The Wall Street Journal. The agreement would involve “an all-stock deal with no premium”, which means that Philip Morris would control 59% of the combined entity. This “merger of equals” would involve a “balanced” name, board and management team. It could be agreed “within weeks”. Both groups have been grappling with slowing demand for cigarettes and the advent of new smoking products.
The original rationale for the split didn’t pan out, says Tom Buerkle on Breakingviews. The idea was that Philip Morris “would capitalise on the faster growth available in emerging markets, without the drag of US constraints”, including litigation. Yet the US market hasn’t proved that bad. In the last eight years, “Altria has provided shareholders with a total return of nearly 300%, including dividends”, while PMI has “managed barely more than half that”.
Better late than never
This isn’t the first time a remerger has been considered, says The Economist. Three years ago an analyst at Wells Fargo urged PMI “to reunite with its former parent”. Reuniting still makes sense today, given the “global arms race” for “reduced-risk” products, which use fewer harmful chemicals. Last year Altria bought 35% of JUUL Labs, a maker of popular high-nicotine vaporisers, for $12.8bn. Similarly, PMI has spent $6bn since 2008 “to develop IQOS, a smoke-free device that heats tobacco and is expected to represent 40% of its sales by 2025, up from 14% last year”. This deal isn’t just about Altria and PMI, say Andrew Edgecliffe-Johnson and Alice Hancock in the Financial Times. It also “reflects the profound disruption tobacco companies are facing” due to the decline in cigarette consumption and the “format war” between new technologies such as vaping and heated tobacco. At the same time, the US tobacco industry is facing “the biggest regulatory threat to cigarettes since the 1990s” as well as “deep uncertainty about how regulators will treat the new products it is counting on for growth”. For example, the US Food and Drug Administration has proposed a ban on menthol cigarettes, “which account for about a third of US sales”, and “more graphic health warnings on cigarette packets”.
“There is more smoke and a lot more fire ahead for Big Tobacco”, as it is likely “to spark further consolidation in an industry where size matters,” says Sabah Meddings in The Sunday Times. With the merged company set to have annual sales of $50bn, there will be pressure on rival BAT to do a takeover of its own to keep up. Japan Tobacco and Imperial (third and fifth globally) will also be nervous as “it’s not easy being the fourth-biggest company out of four”.