PM USA, Swedish Match Match?

Citigroup analysts place greater than 50% chance on acquisition after PMI spinoff

Samantha Oller, Senior Editor/Fuels, CSP

NEW YORK -- Imagine a tobacco supplier with No. 1 market share in cigarettes, premium and mass-market cigars and chewing tobacco, and who is among the top three players in smokeless. This company could very well come intoexistence next year should Altria Group Inc. acquire Stockholm, Sweden-based Swedish Match AB, parent company of Swedish Match North America, as two industry analysts are predicting.

Citigroup analysts Bonnie Herzog and Adam Spielman presented their arguments for the match in an investor call yesterday, placing a more than 50% probability [image-nocss] that it would take place after New York City-based Altria spins off Philip Morris International, which is expected to happen next year. [To learn more about tobacco news and trends,click here to register for the upcoming CSPNetwork CyberConference "Tobacco Update With Bonnie Herzog" on December 5.]

The wins include:

Adjacency Growth. It would allow Altria, which recently picked up cigar manufacturer John Middleton Inc., to further expand Philip Morris USA's adjacency strategy into other tobacco products.

Swedish Match is the No. 1 player in premium cigars, with about 35% market share, and that's a category whose volume trend is about plus 2%, said Spielman during the call. In addition, Swedish Match has a small position in the mass-market segment, and we believe that would fit very well with the John Middleton business.

Swedish Match also has a strong and growing position in the smokeless market, Spielman argued, and its brands do not conflict with PM USA's Marlboro smokeless products in the discount sector.

International Growth. Because of declining tobacco volume in the United States, Altria/PM USA must look outside this country for growth opportunities. PM USA to do this by itself would be quite difficult, because it doesn't have any brands and doesn't have any distribution outside the US, and few staff with international experience, Spielman noted. If it bought Swedish Match, it would immediately give itself a no. 1 position in snus globally. By buying Swedish Match, PM USA would be building a defensible position overseas with a long-term growth outlook.

Financial Synergy. If Altriaafter PMI is spun offacquired Swedish Match at an estimated 182 Swedish kroner per share, it would take on about $11 billion in debt from Swedish Match and John Middleton combined. This amount of leverage would be positive for MO/ex PMI [Altria after PMI is spun off] given its EBIT will be over $6 billion, the analysts stated in a research note. We expect it to be accretive, too.

Analyst Herzog told attendees that Altria doesn't necessarily need Swedish Match to fulfill its adjacency strategy, but it would be a great strategic fit for PM USA. After PMI is spun off, she maintained, they are going to want to do whatever they can to continue to grow the business, and increase profitability in the existing marketplace. We also think they're going to be much more willing to think outside of the box and act like a consumer product company. That's why we came to this conclusion, and it makes a lot of sense.

After being reached by CSP Daily News, representatives of both PM USA and Swedish Match declined to comment on the speculation.

Herzog said that PM is tight-lipped about anything touching acquisition opportunitiesthey never gave me an indication they're going to do this deal, but strategically it makes sense, she told attendees. Her sense, however, after having spoken with PM management, is that a Swedish Match acquisition is definitely an option.

Their signal has been that they think they could do [smokeless products] themselves but I think that could be an interim stage, Herzog said, referring to PM USA's Marlboro Moist and Marlboro Snus, still in test. But they have not necessarily ruled [acquisition] out. Swedish Match would be a better acquisition fit, she said, than UST for example, because of its international presence and it would enable PM USA to better leverage its own brands.

Spielman, meanwhile, said in his discussions with Swedish Match management, he sensed that the company was open to sellingunder the right conditions. Whenever I've discussed it with them, they think they've got a good story but they would absolutely consider any offers that came in, he said. I don't think the management exactly would be happy to lose independence, but I think at the right price, they'd be prepared to accept in a fully professional manner.