Analyst: Environment Ripe for PMI & Altria Merger

NEW YORK — Wells Fargo Securities LLC remains optimistic that Philip Morris International (PMI) and Altria Group Inc. will tie the knot.

According to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities, "the environment looks increasingly attractive for a PMI/Altria combo."

She put a roughly 70-percent probability rate on a deal materializing in the next few months.

The possibility of PMI and Altria merging has grown since the two tobacco companies expanded its alternative tobacco pact two years ago.  The pact is the catalyst behind PMI bringing its heat-not-burn product, known internationally as iQOS, to the United States. 

In the past several months PMI has submitted a Modified Risk Tobacco Product and a Premarket Tobacco Product Application its electronically heated tobacco product, known as iQOS internationally, to the Food and Drug Administration's (FDA) Center for Tobacco Products, as CSNews Online previously reported.

If approved, PMI-Altria's agreement — which was first established in 2013 — gives Altria the exclusive rights to commercialize the product in the U.S.

According to Herzog, a combined PMI and Altria make sense for several reasons, including:

• iQOS is worth more to PMI by owning Altria outright;
• The growing need for scale/innovation in global "arms" race in reduced risk products; 
• The potential for U.S. corporate tax reform, and more favorable tobacco regulations and excise taxes; 
• The benefit of accessing Altria's significant cash flow in the U.S. to pay dividends and a return to a robust share repurchase program; 
• The improved and potentially accelerated rollout of iQOS globally; 
• More diversified geographic exposure which will reduce the impact of market headwinds; and 
• The potential to leverage attractive cannabis market if/when it's legalized federally in the U.S.