Likelihood of PMI & Altria Merger Grows

RICHMOND, Va. — With Philip Morris International (PMI) and Altria Group Inc. working together on alternative tobacco products, a move toward joining forces as one company could be on tap.

Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC, has put the probability of a merger between the two tobacco companies at 70 percent within the next six to 12 months.

"For the past nine months we have believed a combination of PMI-Altria makes sense and we now believe the likelihood of PMI acquiring MO in the next several months has increased given the changes in the political and macro environment," Herzog said.

Neither company has commented on a possible merger. However, according to Herzog there are several key reasons Wells Fargo Securities puts a high probability on a deal:

• The U.S. market is now more attractive given the potential for corporate tax reform, the Republican sweep and diversification benefits of U.S. exposure as the U.S. dollar strengthens.
• Global consolidation may force PMI's hand due to the likelihood that British American Tobacco and Reynolds American Inc. will combine, and what appears to be a global "arms" race for reduced-risk products.
• By owning Altria PMI will capture the full margin and accelerate the growth of iQOS in the U.S. given its full control over sales and distribution generating cumulative, incremental operating income of $26.2 billion by 2025 or $8 per share of greater value.
• A merger creates an opportunity to accelerate the global rollout of iQOS.

"Based on our PMI-Altria merger model, we continue to believe this deal will be accretive in year one with PMI paying up to $77 per share for Altria," Herzog noted.

She added a deal could come sooner rather than later because it is in PMI's best interest to acquire Richmond-based Altria before U.S. interest rates rise further, any potential U.S. corporate tax reform comes through, and iQOS is commercialized in the United States.

According to Herzog, PMI's heat-not-burn iQOS remains a catalyst for a joining of the two tobacco leaders — PMI internationally and Altria in the U.S.

"We continue to believe iQOS has the potential to change the trajectory of smoking, attitudes toward risk, and regulatory constraints on smoking behavior. Based on consistently strong 60-to-70 percent conversion rates in key markets, we expect iQOS to reach 'critical mass' within 12-24 months of entry into any given market," she said.  

As CSNews Online previously reported, PMI submitted a Modified Risk Tobacco Product (MRTP) application for iQOS with the Food and Drug Administration's (FDA) Center for Tobacco Products earlier this month.

The move comes three years after PMI and Altria teamed up to establish a framework to commercialize reduced-risk products and electronic cigarettes. Subsidiaries of the two tobacco companies entered into a series of agreements to address intellectual property licensing, regulatory engagement and contract manufacturing.

The two tobacco companies expanded that pact to include a joint research, development and technology-sharing agreement.