PMI, Altria in Merger Talks

‘No assurances’ given in potential deal that would reunite two major tobacco companies

NEW YORK and RICHMOND, Va. — The tobacco landscape may soon shift significantly, with two major tobacco companies considering a mega-merger. Philip Morris International (PMI) has confirmed it is in discussions with Altria Group Inc. on a possible all-stock “merger of equals.”

Prior to the announcement, PMI’s market value was about $121 billion, while Altria’s outstanding stock was valued at roughly $88 billion, according to CNBC.

Richmond, Va.-based Altria spun off New York-based PMI in 2008, with Altria focusing on selling Marlboro products in the United States and PMI selling the brand overseas. In recent years, PMI has had success in several international markets with its heat-not-burn product IQOS, which Altria has the rights to market and sell in the United States. Earlier this summer, the U.S. Food and Drug Administration (FDA) authorized Altria’s plans for IQOS, which now include a market introduction in Atlanta planned for the fall.

In a statement, PMI said, “There can be no assurance that any agreement or transaction will result from these discussions. Additionally, there can be no assurance that if an agreement is reached, that a transaction will be completed.”

Any transaction would be subject to the approval of the two companies’ boards, shareholders and regulators, as well as other conditions, the statement said.

PMI’s shares dropped by almost 6% shortly after the markets opened following confirmation of the talks, while Altria’s shares jumped by more than 9%. PMI’s shares were pressured on Monday amid speculation of such discussions, CNBC reported.

Late last year, Altria made a $12.8 billion investment in San Francisco-based Juul Labs for a 35% stake in the dominant e-cigarette brand. Altria said the e-vapor and heat-not-burn categories amounted to a $6 billion business in the United States in 2018 and $17 billion abroad, for a $23 billion global opportunity. In the meantime, it said it faced a 4%-5% annual decline in cigarettes over the next five years.

Speaking at a NATO-Smoker Friendly event Aug. 22 in Broomfield, Colo., Judy Hong, managing director for Goldman Sachs, New York, said anticipation for IQOS is running high among retailers as Altria prepares for initial testing in the Atlanta market.

She raised the idea of how IQOS would compare to the established success of the e-cigarette brand Juul. With Juul just launching internationally and IQOS bringing the success it has had in several countries outside the United States, Hong said, “It’s not a zero-sum game.”

With global penetration for these products being in the single digits, she said, “There’s a huge pool of consumption that they [both] can go after.”

“We have long believed a combination of the two companies [PMI and Altria] would make a lot of sense, especially now given Altria’s stake in Juul and IQOS coming to market shortly in the United States,” said Bonnie Herzog, managing director of consumer equity research for Wells Fargo Securities, New York, in a recent newsletter.

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