Edit
Tobacco

Possible PMI, Altria Merger May Yield Mutual Benefits

Improved cash flow and IQOS, Juul rollout would help both companies, analysts say
Photograph by CSP Staff

NEW YORK and RICHMOND, Va. — Reaction to two major tobacco makers currently in merger talks—Philip Morris International (PMI) and Altria Group Inc.—has been largely positive, with benefits including scale and a smoother global rollout of both the IQOS heat-not-burn device and Juul e-cigarettes, analysts say.

New York-based PMI issued a statement Aug. 27 that it and Richmond, Va.-based Altria were in talks, but said it could offer “no assurances” that the discussions would lead to a deal or if regulatory agencies or either of their board of directors would allow it.

Nik Modi, managing director for RBC Capital Markets, New York, told CSP Daily News that the potential merger was part of a larger trend for global tobacco companies wanting to do business in the United States.

“These [international] companies are realizing the opportunities in the U.S.—we’ve got the largest profit pool here,” Modi said. Referring to international tobacco makers buying into U.S. businesses, he said, “But it’s not the start of a trend, it’s the end, as British American Tobacco and took Reynolds; Imperial Tobacco took parts of Lorillard; and even Japan Tobacco International has a small business here.”

Modi was uncertain if retailers in the United States would see much difference in terms of Altria’s actions, but it could hasten the IQOS rollout nationally. “There may be more innovation that comes over time because they can leverage each other’s technology,” Modi said of the two companies. “But people are making a lot of assumptions. We’ll have to wait until we have all the final information.”

Altria has interests in both the heat-not-burn IQOS device and Juul e-cigarettes. Late last year, Altria purchased a 35% interest in San Francisco-based Juul Labs for $12.8 billion. And as for IQOS, Altria has a marketing agreement to sell IQOS in the United States. Altria will introduce the product in the Atlanta market starting in the fall.

For Bonnie Herzog, managing director of consumer equity research for Wells Fargo Securities, New York, the potential merger would create a “leading global nicotine company.”

In a recent statement, she cited several ways the two companies would benefit from such a merger:

  • Scale in light of the global “arms” race for reduced-risk products.
  • Stronger, more predictable cash flow.
  • PMI accessing Altria’s cash flow to pay dividends and support a repurchasing program.
  • Improved rollout of IQOS and Juul globally.
  • Improved economics for PMI to sell IQOS directly in the U.S. market.
  • Diversified exposure to future headwinds.

“We see tremendous value creation for shareholders,” Herzog said.

Related Content

Trending

More from our partners